26 October 20
Subscribers questions (CCL, BUB, MP1, EHL, AZS, HLS, ASM, ARF, BLD, TYR, IGL, COPX US)
26 October 20
Subscribers questions (CCL, BUB, MP1, EHL, AZS, HLS, ASM, ARF, BLD, TYR, IGL, COPX US)
25 October 20
Market Matters Weekend Report – prepare for a move into Christmas
23 October 20
Big miners drag ASX into the weekend
23 October 20
Are the likes of REA Group & Carsales.com worth chasing? (MMM, OZL, CSL, JBH, REA, DHG, CAR)
22 October 20
Market recovers from lows, OZL prduction strong, Adore lists tomorrow @ midday (TPW, OZL, HLS)
22 October 20
Tapping into China’s impressive economic growth – who do we like? (MP1, Z1P, APT, ORE, WSA, FMG, A2M)
21 October 20
Stocks edge marginally higher, Energy leads, TPW & MP1 hit hard (TPW, MP1, PPS)
21 October 20
Income Note: Finding yield as rates continue to slide (BHP, CBA, SIQ)
21 October 20
Overseas Wednesday – International Equities & Global Macro Portfolio (APT, Z1P, XOM US, MSFT US, UBS US, QQQ US, DBA US)
20 October 20
Market drifts lower, Westpac does deal with Afterpay, BHP production inline (BHP, APT, Z1P, WZR)
The ASX200 retreated last week as the US tech space continued to unwind, fortunately as the local index didn’t soar with the likes of Apple (AAPL US) and Microsoft (MSFT US) the damage on the downside has been relatively modest in most sectors i.e. the NASDAQ has now corrected 13.4% while we’re only down 5.4% from our post March high. Over recent reports MM has highlighted that the US tech space has been correcting every month since March and Septembers decline is currently just the index maintaining its rhythm like an expert tango dancer – in date order the pullbacks the NASDAQ has now experienced since March are -7.1%, -5.9%, -6.6%, -5.5%, -6.8% and now -13.4%. Obviously, this is the largest so far but were not throwing in the towel just yet, a few fresh comments from the Fed to regain confidence and new highs could be on the agenda.
MM continues to believe the primary action moving into Christmas will continue under-the-hood of the index hence this is where our focus will remain e.g. last week BHP Group (BHP) rallied +3.4% while Fortescue Metals tumbled -5.5%. In these uncertain times elastic bands are being stretched way too far in both directions allowing pro-active investors like yourselves some great opportunities to add alpha (value) to portfolio. Today’s report will focus on 5 switches we are considering in the weeks ahead – its all about preparation i.e. “plan the trade and trade the plan” or in our case investment.
Importantly we remain overall bullish equities but as we’ve already seen this month volatility appears to be back on the rise, no great surprise if we consider what lies ahead – the US election in November, deteriorating US – China relations with Australia & Europe caught in the same mix plus of course the unpredictable twists & turns of COVID-19. MM remains comfortable to “buy weakness and sell strength”, this applies to many facets of the market from index to both sectors and individual stocks.
ASX200 & US NASDAQ Indices Chart
The ASX200 ended last week 5-points higher, interestingly it certainly felt much worse across my screens. While its unlikely that the local market can enjoy another strong rally above 6000 until the US indices stop falling we are very mindful that equities are following their normal seasonal path at this point in time i.e. over the last 10-years the ASX has experienced its largest average annual decline of -1.9% in September only to follow up in October & November with gains which average more than double the previous months losses – seasonally investors should be looking for buy triggers.
Local COVID numbers on Saturday should keep the recovery story on point with Victoria registering its lowest infection number since late June, barring and major surprises the state should be open before Christmas! Meanwhile NSW registered only 3 fresh cases, without trying to tempt fate the statistics are clearly improving which should hopefully flow through to the local confidence and economy in the weeks ahead. However Europe is now facing a 2nd wave with the UK looking set for on / off style lockdowns for up to 6-months, in our opinion this is pretty much the same for everyone until a vaccine is found or countries decide to walk in Sweden’s footsteps – Anders Tegnell is a hero in his country, as elections loom I wonder if others will try and follow their path.
MM remains bullish equities, but we expect volatility to increase.
ASX200 Index Chart
The global heavyweight tech stocks are currently dominating the news for all the wrong reasons but when we stand back and look at global equities, we are only driving over a speed bump at present. A number of global stocks and indexes are benefitting from the decline in the $US, its not just gold and base metals that are revelling in the almost 10% drop in the greenback since March. The chart below illustrates the drop by the likes of Amazon (AMZN US) and Facebook (FB US) has been relatively well absorbed across the whole of global markets, again at this stage its just a typical September pullback before we head into Q4.
MM remains bullish equities short-term.
MSCI World Index Chart
We’ve talked at fairly great length around our like for the Australian Dollar moving forward which by definition is an ongoing bearish $US outlook. This will flow through financial markets in a number of different ways including the below 3:
1 – Commodities like gold and copper are likely to remain strong over the next 12-18 months.
2 – Emerging markets usually have their debt denominated in $US hence its “Christmas come early” when the greenback falls because the cost to service these loans falls compared to their domestic currency.
3 - As the market starts to embrace a bearish $US the previous outperformance by US equities, including the high flying tech sector, is likely to end as other markets simply become comparatively more attractive.
A period of consolidation in the near future wouldn’t surprise us but we still have an initial target 20% higher for the likes of the EEM shown below – good read through many sectors in the ASX.
MM remains bullish and long emerging markets.
Emerging Markets ETF (EEM US) Chart
Rather than repeat a number of our macro views covered over the last few weeks today we have focused on 5 switches we are currently considering, these are obviously constantly evolving but until we want to increase our cash levels the main game in town remains stock & sector rotation. A few important points to bear in mind:
1 – These ideas are constantly being tweaked due to underlying share price movements & / or associated macro moves / changes the switches might change within themselves e.g. sell stock in idea 1 and buy stock in 3.
2 – On the sell side there is an eclectic mix of stocks including taking profit, cutting losses and scratching positions. Our goal is importantly to looking in the windscreen as opposed to the rear view mirror as we endeavour to be invested in the best quality stocks who offer good risk / reward.
Lastly don’t panic your phones aren’t going to bleeping with alerts every other day were just preparing potential ideas I would be very surprised if we send more than 2 alerts over the coming weeks but in this market never say never!
1 Switch OZ Minerals (OZL) to Fortescue Metals (FMG)
This is a switch that might surprise many readers, its within the resources sector between 2 quality companies in very different commodity areas.
OZ Minerals (OZL) – this copper / gold producer is showing us a healthy 50% profit as it bounces around its post March high. We have already lightened the holding, but even great stocks can rally too far as Apple (AAPL US) has shown this month.
Fortescue Metals (FMG) – this quality iron ore producer has already corrected -17.5% and is rapidly approaching our buy zone. This has been another great example of how stocks get too extended in both directions.
MM is considering switching OZL to FMG close to current levels.
OZ Minerals (OZL) v Fortescue Metals (FMG) Chart
2 Switch Macquarie Group (MQG) to Magellan Financial Group (MFG)
This is a tweak on a switch we have been considering for a few weeks between two stocks in the Financial Sector.
Macquarie Group (MQG) - has been in our Growth Portfolio since February enduring both the coronavirus plunge and subsequent recovery. We looked at taking a small profit before last week’s meaningful downgrade, now around current levels we will be scratching the position but it’s hard to see an attractive advance over the next year.
Magellan Financial Group (MFG) – MM dipped our toe into MFG a few weeks ago, as the US pullback unfolds we think the time to top up our holding is close at hand.
MM is considering switching our 5% MQG position into 2% MFG and 3% cash.
Macquarie Group (MQG) v Magellan Financial Group (MFG) Chart
3 Switch Bravura (BVS) to Wisetech Global (WTC).
This is switch is within the topical IT Sector and we’re simply reviewing what stocks in this volatile space look most likely to bounce ~20% into Christmas.
Bravura (BVS) – the company delivered strong results in August, but their outlook disappointed the market, we felt it was prudent from the board at the time but fighting the tape is rarely a profitable game. Unfortunately, the stock looks likely to remain out of favour until management deliver some positive clarity around future earnings.
Wisetech (WTC) – This Cloud- based software solutions business has experienced an extremely volatile ride over the last 18-months but stability is returning to the stock and business. In mid-August, the company revealed FY20 results which catapulted the stock up 30%, there’s nothing like low expectations to help send a stock higher. The company delivered revenue up 23% and the relatively small pullback in September illustrates fund managers are now accumulating the stock.
MM is considering switching BVS to WTC around current levels.
Bravura (BVS) v Wisetech Global (WTC) Chart
4 Switch Costa Group (CGC) to IDP Education (IEL)
We’ve given Costa Group plenty of time to turnaround and after what appears to be another failed foray on the upside, its feeling like time to close out this disappointing holding which is at least positive since January, our eyes are firmly fixed on the recovery space as COVID appears to be coming under control on our fair shores.
Costa Group (CGC) – this fruit and vegetable business continues to struggle and were simply feeling our money could be put to work better elsewhere.
IDP Education (IEL) – this is an industry that the government needs to recover asap and it never hurts to be on this side of the river. When international students return IEL should be one of the best stocks to benefit, this may be a medium-term journey but we believe the stock trading ~30% below its all-time high offers some good risk / reward – we would use stops under $16.
MM is considering the “odd switch” of CGC to IEL.
Costa Group (CGC) v IDP Education (IEL) Chart
5 Switch Emeco Holdings (EHL) to Reliance Worldwide (RWC)
This is a switch from our Growth Portfolios worst performer into a business exposed to the building sector which MM believes is set for at least a few years of almost boom times as global governments stimulate their economies post COVID-19.
Emeco Holdings (EHL) – with the stock falling below the SPP of its recent capital raise MM has decided not surprisingly to not take up our entitlement which by definition makes us question our loyalty to the stock.
Reliance Worldwide (RWC) – this plumbing parts business has rallied strongly of late but we like the risk / reward a few % lower with stops below $3.40. The stock roared higher last month after delivering an excellent result in FY20, sales were up over 5% to more than $1.1bn with performance noticeably strong in the US.
MM is considering switching EHL to RWC around current levels.
Emeco Holdings (EHL) v Reliance Worldwide (RWC) Chart
Our positions as of Friday. All past activity can also be viewed on the website through this link.
Weekend Chart Pack
The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.
Have a great Sunday!
James & the Market Matters Team
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