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 stock / sector rotation in the both US & Australian markets remains at extreme levels, we continue believe the way to add value (alpha) in the current market is through switching as opposed to simply increasing / decreasing cash levels, or market exposure. However investors should always remember all good things do eventually come to an end, we can see ourselves increase cash holdings across the portfolios at some stage before Christmas, ideally the NASDAQ shown below will regain its “mojo” and test / break its all-time high in October following its classic 14% washout of the “weak longs” and increasing number of momentum traders.
Last week, technology and growth stocks hit new September lows which weighed on global markets although it was encouraging to see the ASX enjoy significant outperformance following the strong session by the Banking Sector on Friday, more on that later. So far the markets are following our playbook hence its important that subscribers understand what we expect moving forward from this largely sentiment driven market, especially with the US election approaching rapidly.
1 – MM remains bullish the reflation trade longer-term which is a very positive read through for the resources, but they feel overbought short-term and an ongoing breather feels likely, especially from a relative performance perspective.
2 – We believe that tech is now poised to lead a strong rally over the month ahead, October is historically the strongest month for Australian stocks.
Basically, we’ve seen money flow from the overbought technology sector into the likes of the resources and now its threatening to reverse back again. In our opinion both the Fed and RBA have been very supportive of stocks in recent weeks enabling us to remain positive risk assets such as equities. However as we are seeing with the individual sectors the valuation elastic bands are becoming too stretched and then snapping back in earnest affording some rotation opportunities, we should remain aware that by definition the index itself will do the same at some stage moving forward.
MM is now bullish US tech in the weeks ahead, our current target is over 10% higher.
US NASDAQ Index Chart
The ASX200 finally ended last week up an encouraging 100-points, following a strong US session to end last week the local index is now poised to test the psychological 6000 area, yet again – its now traded round 6000 for 3-months. If the influential Banking Sector can maintain its strength from Friday, we might finally have the momentum to break free of the 5700-6200 shackles but I caution we’ve thought that before.
MM remains bullish equities intro October.
Today I have focused on 4 major sectors which appear destined for some decent out / under performance into Christmas, as its almost the only game in town today we feel it’s vital to performance to be on point with how things are unfolding beneath the hood of the ASX.
ASX200 Index Chart
1 The Australian Banking Sector
On Friday we saw reforms to the Credit Act announced from Canberra ignite a rally in the banks, simply ASIC was cut from the enforcement of responsible lending rules which will now fall back on to the more accommodating shoulders of APRA. Recent years had seen banks tighten controls around credit with ASIC’s enforcement of the code restricting consumers access to loans. Fridays changes are expected to open the proverbial floodgates back to credit which had stagnated, even prior to COVID - remember 10-days ago we said the Australian housing market was disappointing the doomsday merchants as overall residential prices fell by just -1.8% in the June quarter, significantly less than back in 2018 which led us to say : “the banks clamping down on lending hit housing prices harder than COVID!”
Hence this relaxation on the banks’ lending should be good news for housing prices which will improve loan growth and lower bad debts creating a positive flow through effect for the sector.
The decision is a rare win-win for a number of parties hence making it an easy way to stimulate the economy without the government footing the bill while also helping the banks and borrowers alike. This huge shot in the arm led to 3 out of the big 4 banks closing up more than 6% higher on Friday. Technically the picture remains a bit clouded but fundamentally its great news and if we also see an economic recovery / vaccine in the months ahead we could easily be in the early stages of a significant recovery for the sector.
MM is bullish the banks at current levels.
National Australia Bank (NAB) Chart
One of the most supportive factors for the sector is we feel the market is complacently underweight the banks, and in some cases significantly so. Interestingly on Friday when Westpac (WBC) was soaring +7.4% Macquarie Group (MQG) a great performer over the last few years closed down, even when over 60% of the index rallied. A recent downgrade from the “Millionaires Factory” will probably have a number of fund managers considering at least a degree of rotation.
MM prefers the “Big Four Banks” over MQG into Christmas.
ASX200 Banking Index v Macquarie Group (MQG) Chart
Also last week prominent Westpac economist Bill Evans called local interest rates to be cut from 0.25% to 0.1% next month following the RBA deputy governors speech on Tuesday where he alluded to expanding the available monetary toolkit - we felt they were flexing their muscles before the JobKeeper is reigned in next month. Importantly as rates approach zero they still have the firepower to support the economy if required through reducing bond yields which would flow through to cheaper mortgages, as we said last week “in our opinion the property market is front and centre in the minds of the RBA, they certainly don’t want it falling too far too fast.” . Looks like Canberra agrees following their move on lending regulations.
At MM we can now see lower rates in 2020 but our greater conviction belief is that the RBA will be propping up housing if required for the foreseeable future. This is mixed news for the banks who benefit from firm housing prices reducing bad debts but their margins contract in a falling interest rate environment – the banks look good value at today’s levels but until the market believes bond yields have bottomed gains may remain relatively muted. MM remains bullish bond yields medium / long-term but short-term the downward move is intact.
Hence MM is comfortable with our banking exposure, but it feels premature to go heavily overweight.
Australian 10-year Bond Yields Chart
2 The Australian Resources Sector
MM recently temporarily migrated our Growth Portfolio away from the Resources Sector towards the IT space by taking good profits in OZ Minerals (OZL), RIO Tinto (RIO) plus a part profit in BHP Group (BHP) – so far so good but considering we are bullish the “Reflation Trade” into 2021 and beyond its important that subscribers understand our current thoughts and of course how we are looking to regain exposure to the sector in the weeks / months ahead.
Last week copper began correcting as we felt it would, our initial target is another ~5% lower where we will consider re-entering, probably simply back into OZ Minerals (OZL).
MM remains bullish copper into weakness.
Copper Futures ($US/lb) Chart
Similarly, iron ore has been correcting of late taking the pure play Fortescue Metals (FMG) down over 20% in the process. Our ideal entry into FMG is around the $15 area but obviously from a switch perspective it will depend on how the potential funding vehicle is travelling.
MM likes FMG into current weakness.
Fortescue Metals (FMG) v Iron Ore (CNY/MT) Chart
MM is currently holding 3% of our Growth Portfolio in Newcrest Mining (NCM) and as the sector falls under the pressure of a rising $US we believe it’s basically time to tweak this position higher – MM likes NCM around current levels.
MM is bullish gold stocks into current weakness.
Newcrest Mining (NCM) Chart
3 The Australian IT Sector.
Last week MM increased our IT exposure to 15% through purchases of Megaport (MG1) and Appen (APX), we already held Zip Co (Z1P), Bravura (BVS) and Xero (XRO). Our logic in the purchases was simple and well flagged through September:
1 – We had been targeting a +10% correction for a buying opportunity in US tech sector after its blowoff rally following stock splits by Apple (AAPL US) and Tesla (TSLA US).
2 – The push by central banks for yet more stimulus and lower bond yields is good news for tech / growth stocks but we still believe the trend is maturing fast.
Hence, we are now very overweight IT which only makes up around 4.2% of the ASX200, clearly aggressive but works from the correct risk / reward levels in our opinion. Importantly if / when we get our targeted rally in the sector MM expects to liquidate a number of these holdings into strength – remember don’t be afraid to take profit in today’s market. Amazon (AMZN US) is a good leading indicator for the sector and it remains bullish.
MM is targeting a ~15% rally by Amazon (AMZN US).
Amazon (AMZN US) Chart
On-line accounting software business XRO has held up well in the latest “tech rout” which illustrates the quality of the business. We like everything about this business except the share price valuation which is certainly assuming significant growth in the years ahead, however it’s clearly a high quality business and a break into the $105-$110 target area now seems very likely.
MM is bullish XRO looking for 6-10% upside.
Xero (XRO) Chart
The “Buy Now Pay Later” (BNPL) has corrected significantly in September and although we feel they should bounce strongly, especially into October when retail starts to heat up with big sales events in the US, we are dubious whether they can regain the euphoria which sent APT towards $100 earlier in the month. Hence, we are monitoring our Z1P position in the space closely.
MM is becoming increasingly cautious on the BNPL space.
Afterpay Ltd (APT) Chart
4 The local “Yield Play”
Australian interest rates are already at an all-time low but prominent Westpac economist Bill Evans feels they will go even closer to zero next month. Hence not surprisingly, reliable & sustainable yield has become even more craved by investors, assuming rates do get cut to 0.1% next week it’s hard not to imagine the “yield play” stocks benefitting at least short-term plus some less traditional avenues might enjoy a bid tone, especially until the bank stocks come back into the game.
MM believes Australian official interest rates may we headed down towards zero.
Australian Official Cash Rate Chart
Toll operator Transurban (TCL) enjoyed a great week rallying well over 8% as people become more optimistic on the economy re-opening plus its relative yield is now expected to become even more attractive. MM is comfortable with our TCL holding in our Income Portfolio and with interest rates tumbling we see no reason not to remain almost fully invested at current levels.
MM is bullish TCL targeting $16 minimum.
Transurban (TCL) Chart
1 – MM likes the banks after last week’s power switch from ASIC to APRA but we don’t think its time to be too aggressive just yet.
2 – MM is looking to accumulate resources on the back foot into current weakness but in October we anticipate tech will outperform.
3 – MM is bullish the IT Sector short-term, but we believe this great bull market rally is maturing fast.
4 – MM is bullish the overall “yield play” with interest rates looking set to fall further.
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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