23 September 19
IOOF wins big over the regulator, Webjet down after Thomas Cook collapses (WEB, IFL)
23 September 19
IOOF wins big over the regulator, Webjet down after Thomas Cook collapses (WEB, IFL)
23 September 19
Subscriber’s Questions – (A2M, BAL, FMG, NCM, NST, PAR, QRI, SEC, WPM US)
22 September 19
Market Matters Weekend Report Sunday 22nd September 2019
20 September 19
ASX up but off session highs – go the Sea Eagles!
20 September 19
Markets believe there’s a 70% chance of an RBA rate cut In October, how should we invest? (CBA, TCL, SYD, BLD, BHP)
19 September 19
Fed cut helps equities rally
19 September 19
Do we see any value in the ASX200’s 5 worst performers? (A2M, ING, IEL, SDA, CYB)
18 September 19
Gold & IT stocks best on ground, Energy stocks weigh (CNI, CMA, QAN)
18 September 19
Income Report: Stepping up and fading the recent move in bond yields – includes portfolio buy-sell alerts (SKI, TCL, FLT, WHC, EHE)
18 September 19
Overseas Wednesday – International Equities & ETF Portfolios (GDX US, NCM, BABA US, TTD US, PSH NA, BAC US, RY CN)
The ASX200 surged higher early last week before coming under selling pressure on Thursday, and especially Friday, however we did again perform extremely well compared to our global peers i.e. ASX200 +0.2%, US S&P500 -2.1%, German DAX -1.2% and the Japanese Nikkei -2.7%. On the sector level we saw some weakness creep into the financial sector but the broader market remained supportive with over 56% of the index closing positive plus ten of these managed to rally by over 5%.
We all know global equity markets have enjoyed a phenomenal run since their panic lows in late December with the ASX200 putting on close to 18% when we take dividends into account, a great performance compared to most term deposits paying below 2.5% pa. We have been bullish for the first half of 2019 but the acceleration of the markets recovery was far greater than we anticipated. That said, we must always look forward and we still have 4-months remaining of this financial year, hence what’s next and most importantly where should we park our hard earned money is the focus of today’s report. Below is how we currently see things playing out from here:
1 – The ASX200 has been trading with almost perfect rhythm since December of ~375-points per month which implies either 6500, or 5900, this March. I actually cannot see either and feel the time for the market to have a rest has finally arrived, a pullback towards 6050 / 6100 feels more likely i.e. around 2% lower.
2 – After finishing looking at all the stocks within the ASX200 the theme is largely the same i.e. not good risk / reward buying just here but interesting a few % lower, this ties in with point 1.
3 – We are bullish moving forward but are mindful that major resistance for the accumulation index is now only a few % higher, again suggesting any buying should be very stock specific.
At MM we are neutral the ASX200 just here but looking to buy a few selective stocks a few % lower – scary, I have typed that before this year!
We are holding 29% and 19.5% cash respectively in our Platinum & Income Portfolios, plenty of ammunition to buy a pullback.
ASX200 March SPI Futures Contract Chart
Last week the ASX200 Accumulation Index (including dividends) broke its all-time high previously reached in August 2018, pretty amazing stuff considering the macro uncertainty both locally and overseas. This is a great advert for long-term share market investing plus the power of compounding dividends – similar to the compound interest lessons we all received back at school.
History tells us through the chart below that this is a dangerous area to be overweight equities as the last 3 forays to test the overhead trendline resistance (red line) has been followed by 15-20% corrections but its also important to note that the market has a habit of staying at these elevated levels for a while i.e. don’t panic! Also, valuations are now back above their historic averages adding weight to our view that it’s time to become more defensive in stock / sector selections.
MM still believes there is money to be made from the Australian share market, but it’s likely to predominantly in the form of dividend yield and secular growth as opposed to continued expansion of sales & operating margin. Companies exposed to a continued deceleration of world growth appear the most vulnerable to disappointment, especially as not all share prices appear to have this risk factored in.
ASX200 Accumulation Index Chart
We saw a few events unfold last week that I believe gives us a few clues for local and global equities over the weeks ahead.
On Friday the Chinese market tumbled the most in over 5-months closing down 4.4% following traders / investors taking a rare sell rating from the countries largest brokerage as a sign China’s government wants to slow down the rampaging market which had gained almost 30% in just a few months. A pretty logical thought process as the Chinese market is very prone to bubbles and crashes, I assume not what the government desires as their economic growth slows down to ~6% - that’s if you believe their figures but either way its slowing.
The language used by Citic Securities was pretty aggressive saying “Peoples Insurance Company (Group) of China Ltd” shares were “significantly overvalued” – I cannot imagine they would dare say this without instruction.
Hence it appears that the Chinese market is due for at least a few weeks rest on the upside.
China’s Shanghai Composite Index Chart
At MM we usually watch the US small cap Russell 2000 very closely because its often the leading indicator for US indices. Unlike our own ASX200 this lesser known index has followed our anticipated path in 2019.
So far the Russell 2000 has corrected over 6% from its late February high but our ideal target is another 4-5% lower. Similar to our comments around the ASX200 earlier we can see US stocks consolidating in March with a downside bias.
Russell 2000 Index Chart
Conversely when we stand back and look at the bigger picture things still look pretty good. Our preferred scenario for the US tech based NASDAQ is now for a test of the 8000 area in 2019/2020, or another 15% higher moving forward.
This implies the market will give central banks the benefit of the doubt for a little longer as they attempt to balance slowing global economic growth with QE & interest rates – a tough gig with our own RBA arguably commencing one of the most difficult journeys of all for the respective central banks.
NASDAQ Index Chart
1 Global bond yields are still falling
On Friday night US unemployment showed the weakest level of hiring in the US since 2017 which lead to further pressure on both bond yields and the $US – questions are definitely being asked of the US economies ability to remain resilient as a number of other regions struggle. Wage gains did improve which is good news but the main focus was on jobs and they are suggesting economic growth is at best cooling.
Interestingly a potential recession in 2019 / 2020 was blamed when stocks tumbled in December but there was one large difference i.e. interest rates. When US stocks fell 20% in late 2018 the main reason being cited was the Fed was going to raise rates too fast and send the US into a recession, now the Fed has switched to a far more Dovish stance which is exactly what fuelled the major bull market post the GFC.
Australian 3-year bond yields still look destined to make fresh lows below 1.36% which implies at least one interest rate cut in 2019. US interest rates remain firmly above our own which has been a major negative influence on the Australian dollar ($A). However I still believe more bad news economically has been built into our own economy / bonds rather than those in the US where everyone remains fairly upbeat on the economy, even after Fridays employment disappointment – an ongoing risk in my opinion.
I continue to see at least a narrowing in the differential between Australian and US bond yields with a potential return to the historical norm by the end of 2020 i.e. Australian interest rates / bond yields back above those in the US. However at this stage both local and US bond yields are falling together as global economic optimism rapidly diminishes.
Australian 3-year versus US 2-year bonds (yield) Chart
Last week the pullback in Junk bonds hardly registered on the charts as can be seen below. I’ve noticed a few subscribers have wondered why we put so much emphasis on corporate debt hence I will put things in perspective:
1 – In 2019 over $80bn has poured out of US ETF’s / Mutual Funds but stocks have rallied significantly. Where’s the buying coming from?
2 – However buybacks in the US so far this year are rapidly approaching $200bn, that’s real firepower.
While the “Junk Bond” markets are healthy stocks are likely to rally as companies continue to buy-back their own stock.
NB This explains why the US market has struggled over the last decade as we approach reporting season because buy-backs have to put on hold for regulatory reasons.
iShares IBOXX High Yield Bond ETF (“Junk”) ETF Chart
2 The $A & $US remain balanced.
No major change, the $A has hit our mid / high 60c targeted area perfectly and we believe that we will see 80c in 2019 / 2020. – MM remains very wary of the crowded $US earners trade medium / longer-term.
Our view is based on a few pieces of the puzzle but primarily on the extreme pessimism / optimism towards the respective economies, Friday showed that some unexpected chinks may be appearing in the US just as President Trump is contemplating the election in November 2020.
The Australian Dollar ($A) Chart
We are currently holding 2 recognised $US earners ResMed (RMD) and QBE Insurance (QBE), as readers know an area where MM doesn’t want heavy exposure.
QBE Insurance (QBE) has been a serial underperformer since the GFC but it’s enjoyed a healthy ~30% rally since December, plus it paid a 28c part franked dividend last week. Short-term we have been considering taking our $$ in QBE around $13.
QBE Insurance (QBE) Chart
Elsewhere within the insurance sector we are considering IAG which yields better than QBE but unsurprisingly does trade on a higher valuation – perhaps an opportunity to “leg a switch” between the two.
Insurance Australia Group (IAG) Chart
3 The “Growth Sector” continues to interest MM.
Following on from our bullish medium-term outlook for the US NASDAQ its logical that we are considering a couple of our own high flying and highly correlated “Software & Services” stocks at the right risk / reward levels – the local “Growth Sector” continues to agree with our previous bullish outlook for stocks in H1 of 2019 i.e. bullish but choppy.
At this point in time our favourite two are Appen (APX) and Altium (ALU), two stocks we took profit on way too early this year prior to them both hitting the ball clean out of the park during reporting season, but as we often say investing is about adding value, making $$ and not ego – we are comfortable buying stocks at higher prices than we sold if the fundamentals / technicals make sense, although we don’t plan to make a habit of it!
Both Appen (APX) along with Appen (ALU) have been the big leaders of both the ASX200 and the “growth” sector in 2019 although there upside momentum has slowed.
MM is considering re-entering APX below $22.50 and ALU under $32.50.
Appen (ASX: APX) Chart
Altium (ALU) Chart
4 The Iron ore rally appears to be maturing
The iron ore price has soared in 2019 due to the awful disaster at Vales mine in Brazil, the death toll appears to be well over 300 and employees have already been arrested – potentially a long-term economic game changer for both the country and sector.
However the softening Chinese and US economies appear to have relieved the upside pressure from the bulk commodities as it closed down 2% on Friday and over 8% below Februarys high. The current volatility may enable us to venture back into what’s probably our most successful vehicle since our inception – Fortescue Metals (FMG).
MM likes the risk / reward with FMG around $6.20 targeting ~15% upside i.e. an active position.
Market heavyweights BHP, RIO and FMG have all enjoyed excellent rallies over recent years as they have paid down debt and followed an exciting path of rewarding patient shareholders with impressive buybacks and special dividends but as we said at the start of today’s report, what now?
I feel they are still very well positioned stocks but the risk / reward has diminished and entry levels need careful consideration especially as the market feels “long the sector” as this moment in time – MM only anticipates small forays into the sector similar to that discussed for FMG.
Iron Ore Active Contract Chart
Fortescue Metals (FMG) Chart
5 Updating our “shopping list”.
As the market has evolved higher we are becoming more pedantic on stocks and the respective levels where MM has interest:
1 – We like G8 Education (GEM) around current levels, one that we are better off not buying previously.
2 – We like Star Entertainment (SGR) around $4.10 which still feels possible after the casino operator fails to rally above $4.50.
3 – We like Medibank Private (MPL) around $2.70 but we are already long NIB hence an unlikely purchase.
G8 education (GEM) Chart
We’ve also updated and significantly reduced our list of recent “dogs” that we are considering buying at lower / current levels, a split of 2% into 4 / 5 remains our preference – we already have CGC, PGH and BIN.
1 – Haelius (HLS) around $2.60, or ~ 4% lower.
2 – Nufarm (NUF) around $4.75, or ~10% lower.
3 – Nine Entertainment (NEC) around $1.20, siginificantly lower.
We remain mildly positive medium-term targeting a choppy advance through Q1/Q2, it feels like the chop is about to show its face.
We continue to see MM being active moving forward with our “buyers hat” now in place as we sit relatively cashed up on both portfolios.
We currently like the concept of being relatively fully invested in stocks and using a negative facing ETF to add some downside protection when it feels appropriate, as we did at the end of last year.
Watch for alerts.
Chart of the week.
Copper and gold producer Sandfire Resources (SFR) looks very average technically with an ideal target ~30% lower.
MM is bearish SFR with a potential target ~$4.50.
Sandfire Resources (SFR) Chart
Investment of the week.
MM holds 7% of our Platinum Portfolio in Telstra (TLS) and happily unlike most of the country we are ahead by over 10% from this investment before we consider franking credits.
The risk reward is not compelling to add to our position but if our holding were smaller I would be looking to buy ~$3.10, conversely we will take some $$ from the table around $3.50.
MM likes TLS for at least another 10% upside.
Telstra (TLS) Chart
Trade of the week.
Obviously FMG that we discussed earlier was considered for this spot but a stock we hold and may even average came out on top although its is more of an investment / trade.
MM likes ALL around $23.50 but a break much lower will concern.
Aristocrat (ALL) 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 day!
James & the Market Matters Team
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