Market Matters Report / Market Matters Weekend Report Sunday 10th November 2019

By Market Matters 09 November 19

Market Matters Weekend Report Sunday 10th November 2019

Market Matters Weekend Report Sunday 10th November 2019

The ASX200 finally managed to close up +0.8% after threatening to break both down and up with different stocks / sectors vying for attention almost daily. We saw ongoing big moves under the hood and even within sectors themselves, the banks spring to mind initially getting sold-off aggressively following Westpac’s (WBC) average result and subsequent capital raise, only to bounce back strongly when National Australia Bank (NAB) delivered an in-line result – note even after its dividend cut WBC is yielding 5.8% fully franked compared to Term Deposits ~1.5% unfranked. Overall it was a clear risk on week with noticeable strength in the Diversified Financials / Resources & IT stocks while the Golds, Real Estate & “Yield Play” stocks struggled. 

The ASX200 continues to experience choppy sector rotation while the index itself remains in the same Neutral Pattern since late July.

The risk on theme was led by one macro move, triggered primarily by optimism around the US – China talks, if a trade war is averted plus ideally tariffs are lifted its bullish for global growth. As optimism around the global economy returned we saw bond yields bounce e.g. Australian 10-year bonds have rallied from sub 0.9% to almost 1.35% in just 5-weeks, that’s a very meaningful 50% increase! We all witnessed in Q4 of 2018 when the market changes its opinion on bond yields the moves for both equity indices and underlying sectors can be dramatic.

However I stress at this stage we believe it’s no more than a correction within the recent significant bear trend for interest rates and bond yields. At MM we are maintaining our view that interest rates will remain “lower for longer” although we are not convinced that central banks have much appetite to cut further, in Australia the RBA slashing rates to 0.75% appears to have stabilised housing prices but I’m sure they don’t want to see them start rallying too fast as the bubble concerns will resurface very quickly. We think it’s time for some fiscal stimulus from the government, central banks look about done with their monetary efforts.

We feel the gyrations between sectors is being caused by investors / fund mangers trying to second guess what’s next from bond yields plus the majority appear to have been positioned for interest rates to continue falling, a view  that’s clearly under pressure at present.

Our underlying view towards the ASX200 remains intact: MM is technically neutral to bullish while our “Gut Feel” is we will see fresh all-time highs before Christmas.

ASX200 Index Chart

The chart below illustrates perfectly a couple of standout points on interest rates:

1 – Post the GFC Australia’s Cash Rate has been in a distinct downtrend except for a period of economic optimism between 2009 and 2010, around 10-years ago!

2 – The US Cash rate has actually been increasing since 2015/6 as the US economy strengthens.

3 – US interest rates have been above our own for around  2-years, an usual scenario through history and one that has led to the decline in the $A below 70c i.e. why hold monies in $A as opposed to $US when the later will pay you more interest.

However, more importantly what comes next? At this stage we expect the local cash rate to oscillate between 0.5% and 1% for probably a few years while we believe the differential between Australian and US rates will narrow and eventually revert back to the historical norm i.e. higher interest rates in Australia. Remember Trump wants a weak currency to increase competitiveness of the US.

Australian RBA & US Fed Official Interest Rates Chart

Following the combination of comments / noises from a few central banks and positive leaks from the US – China trade talks the markets losing faith that the RBA will again cut rates in the near future hence bond yields have bounced but when we stand back and look at the chart below of the local 10-years its only a blip in the descent from the now distant 2.5% area, at least at this stage.

Technically we had been targeting this bounce in both our own and US 10-years but now it’s occurred what side of the fence do we sit? Unfortunately now we’re on the fence! We are watching 2 potential scenarios which will probably see us increase our risk on / buy value positioning but in different ways:

1 – Bond yields continue to rally, above 1.5% for the local 10-years and we have to be positioned that rates have bottomed – not good news for our 2 gold stocks.

2 – Bond yields again start to decline following the trend with local 10-years closing below 1.2%, this would suggest a test of ~0.8%, a move that will probably see risk sectors sold-off but we will be  waiting to increase our exposure to the likes of resources towards fresh 2019 lows in bond yields.

Australian 10-year Bond Yield Chart

The choppy price action by the $A over recent weeks again illustrates how uncertain markets have become with regards to what comes next, it cannot get any meaningful traction in any direction above 69c, or below 68c. However this should be no great surprise, the $A has been entrenched in a Bear Market since 2011 and like most trends that have been playing out over a number of years they often give a few false dawns before giving up the ghost.

MM remains bullish the $A eventually targeting the 80c region – a very contrarian view.

Australian Dollar ($A) Chart

Unlike the better known US indices the small cap Russell 2000 remains in the middle of its late 2018 / early 2019 trading range, similar to the ASX200 just on a larger scale. Our “Gut Feel” at MM is this index, which is usually a good indicator of investor optimism as it includes the more speculative US stocks, should like its big brothers make a fresh all-time high in the months ahead i.e.  around 10% more upside.

From a technical perspective a false breakout above 1750 would generate an excellent sell signal but until then no such warnings are being flagged although people keep asking / looking for them i.e. don’t fight the trend just yet, the bull market remains intact for stocks.

US Russell 2000 Index Chart

Following another fairly quiet week one thing did catch my eye with leading indicator copper, important as MM has a bullish exposure in our Platinum Portfolio.

1 – Copper is close to breaking on the upside with MM initially anticipating 10% upside but on Friday night when President Trump pushed back on the tariffs unwind the industrial metal rapidly retreated -1.7%, this price action implies to MM that to reach our $US300/lb target area the US & China need to resolve their differences.

2 – Conversely while equities did initially spike lower on the news they recovered steadily to close both positive and on the highs of the day – stocks feel bullish when they are resilient to bad news, this coincides with our view that fund managers are underweights stocks looking to buy weakness.

Copper ($US/lb) Chart

1 –  The MM Platinum Portfolio

Last week we trimmed our Costa Group (CGC) position back to 5%, as we intend to take up the 1:4 rights at $2.20 – not hard with the stock is close to $2.80. We also invested 4% into Pendal Group (PDL). Our cash level now sits at 8.0% - https://www.marketmatters.com.au/new-portfolio-csv/

Before I consider our troublesome gold positions I will look at something far more palatable, our holding in BlueScope Steel (BSL) is rapidly approaching our $14.50 target area, now ~2.5% away. Conversely the very highly correlated Sims Metals (SGM) has generated a strong technical buy signal, with a 20% upside target, after appearing to clear the decks with their latest profit downgrade plus they are maintaining their buyback of up to 10% of the company, that’s a major buyback!

MM is considering realising an excellent ~19% profit in BSL and switching the funds to SGM.

BlueScope Steel (BSL) & Sims Metals (SGM) Chart

Last week the Australian gold sector continued to decline in an amplified manner when compared to the actual precious metal itself - it appears the market was longer than we thought. It’s easy to throw our hands up in the air and say we’re wrong and cut the positions but remember we are now 50-50 on bond yields, after the “pop”  we were expecting, which if anything implies the risk / reward favours buying gold stocks into current weakness.

MM will give our gold exposure a little more room but have no intention of averaging – not being brave today!

Newcrest Mining (NCM) Chart

Lastly and relevant to our struggling gold position is the position of a few defensives,  we have deliberately singled out market darling Transurban (TCL) which we hold in the MM Income Portfolio. The toll road operator feels like it might take another leg down and potentially well under $14 but if this does unfold we will be looking to go long around $13.50 – TCL is a classic defensive / yield player where investors might have  found themselves too long.

MM likes TCL around $13.50, or ~8% lower.

Transurban (TCL) Chart

2 MM Income Portfolio

We discussed selling CSR on Wednesday after the share price rallied strongly on takeover rumours, however we held on to pick up the dividend late in the week. We have now banked that and can cut the position to lock in a nice ~40% profit.  We have also recently switched from ANZ into WBC given the change to franking credits in the former.

Cash remains low in this portfolio however given the large spread between current cash rates and equity yield, we continue to view equities as cheap. Our cash position remains at only 0.5%: https://www.marketmatters.com.au/new-income-portfolio-csv/

3 major Australian interest rates / Bond yields Chart

3 –  International Equites Portfolio

No change, our cash position remains at 48% : https://www.marketmatters.com.au/new-international-portfolio/

At this stage we still believe that there are 3 ingredients missing from our International Portfolio, firstly is some extra resources exposure, BHP is good but we like fancy more, secondly more banks and lastly exposure to the Emerging Markets.

1 - With copper stocks likely to open lower next week courtesy of President Trump it feels like an opportune to press the buy button, our preferred vehicle is Australian company OZ Minerals (OZL) which already resides  in our Platinum Portfolio.

MM is bullish OZ Minerals (OZL) at today’s prices.

OZ Minerals (OZL) Chart

2 - We already own Bank of America (BAC) which is looking after  us nicely but there’s no harm with increasing exposure to a good thing. MM is bullish Citigroup (C US) at today’s prices.

Citigroup (C US) Chart

MM has been talking about wanting increased  exposure to the Emerging markets for a few  weeks, we believe e-commerce giant Alibaba (BABA) has now put its hand up as the ideal candidate. MM is bullish Alibaba (BABA US).

Alibaba (BABA US) Chart

Conclusion

MM is bullish OZ Minerals (OZL), Citigroup (C US) and Alibaba (BABA US) as discussed above.

4 - MM Global Macro ETF Portfolio

Also no change to this portfolio, our cash position remains at 51.5% : https://www.marketmatters.com.au/new-global-portfolio/

As discussed last Wednesday our favourite view moving forward is to buy the British Pound , we feel Boris Johnson will win the election and BREXIT will finally get sorted, surely common sense will finally prevail. It’s just a matter of timing, the recent pullback is feeling perfect.

The ETF will like to “play” this view is the Invesco British Pound Sterling Trust (FXB US): https://etfdb.com/etf/FXB/

British Pound (GBP) V$US Chart

Conclusion

No change, MM likes the British Pound into current mild weakness.

Chart of the week.

Computershare (CPU) is a stock that’s struggled over the last 12-months, investors have become concerned about the longevity of their business model as the ASX starts to embrace blockchain solutions moving forward. While we believe the threat is real the 32% correction is building in a lot of bad news, the risk / reward with buying today with stops below $16 is very attractive i.e. 4% risk compared to around 20% upside.

MM is bullish CPU with stops under $16.

NB This would be s shorter trade if we took it given the uncertainty around what blockchain technologies will ultimately mean for traditional share registries.

Computershare  (CPU) Chart

Investment of the week.

Goodman Group (GMG) is another defensive play which has become interesting following its 17% correction. We could buy GMG above $14.50 with stops below $14 i.e. 3.5% risk with a target well over 10% higher, good risk – reward.

MM likes GMG above $14.50.

Goodman Group (GMG) Chart

Trade of the week.

What a difference a week makes! Last week we wrote “Technically this stock looks great for new highs, with the trend, but I stress its huge valuation would have us on high alert into any sudden weakness.” Well the biotech did just that and now a dip of below $2 looks on the cards although technically this would look very interesting to MM if it happened.

MM now likes PNV around  $1.95.

PolyNovo Ltd (PNV) Chart

Our Holdings

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.






Enjoy your Sunday

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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