Market Matters Report / Market Matters Weekend Report Sunday 16th September 2018

By Market Matters 16 September 18

Market Matters Weekend Report Sunday 16th September 2018

Market Matters Weekend Report Sunday 16th September 2018

The ASX200 enjoyed a better week finally gaining +0.36% courtesy of the strong rally on Friday. When we stand back and look at 2018 its clearly been a choppy year with periods of optimism and pessimism arriving and departing on a couple of occasions but as we sit down this morning with 80% of the calendar  year behind us  the ASX200 is up just +1.6% before dividends, having experienced a 649-point range between 5724 low in April and 6373 high at the end of last month. Interestingly since the extreme volatility of the GFC the average annual range of the ASX200 is 850-points, with 2-years finishing quieter than 2018 has been so far to-date which suggests to us the main index action for 2018 could easily be behind us.

We have an very keen appetite for reading at MM although it’s still hard to match Warren Buffets 5-6 hours a day leading to one of his famous quotes – “ I simply read and think”. One area we do spend considerable time on is evaluating at our own investments / written work as MM constantly strives to improve. We believe in hindsight MM has been a touch too focused on looking for the next major pullback, especially in our written pieces, as opposed to simply deciding on what our overall “investment theme” is at this stage of the stock market cycle i.e. aggressively long, conservative etc. In our defence this has probably been influenced by our picking both the major swing high & low in 2015 and 2016 which certainly adds great Alpha to a portfolio but there’s a difference between being aware of the risks / reward and becoming a touch too preoccupied with the potential but rare large moves.

The key to successful investing this year, like so many, has been stock and sector rotation e.g. So far in 2018 the Utilities Sector is -8.2% while the energy sector is up +10.2%. When we consider these significant differences in performance its easy to comprehend how Alpha (relative performance) can be made or lost and when compounded over a number of years this can have a very meaningful impact on an investors net wealth.

Today’s report is going to take a slightly different form than usual and focus on the 11 sectors within the ASX200 and of course some stocks we particularly like within some sectors.

We only have to stand back and look at history to know that stocks are the best long term investment and its only when people become too caught up in the classic emotions of  “Fear & Greed” do stocks get a bad name – this negative effect has been compounded over the last decade because it’s so easy / cheap to buy and sell shares.

One could argue it’s a simple game, buy stocks in the correct sector for the next few years economic / stock-market cycles and on a rolling basis the returns should be great, of course its not always easy to identify the correct sectors and that’s one of our jobs at MM.

Historical returns of traditional Australian Investments Chart

The macro outlook

Due to our relatively lacklustre economy and very large household debt burden Australian 10-year bond yields have only increased to 2.6% from a low base of ~1.8% in 2016. An extremely small increase compared to the US who have seen 10-year yields more than double to 3% from almost 1.3% - similarly the RBA have kept the official cash rate at its lowest level in history of 1.5% compared to the US who have seen 7 rate hikes with their target rate now sitting between 1.75% and 2% - its easy to see why the $A has been weak.

Our view at MM is that Australian 10-year bond yields are heading higher with ~3.5% the obvious next target area. We would note that investors are now so convinced that US rates are going higher into 2019 that surprises are more likely to be for a slower rate of increase. Moving forward we still want our portfolios to be structured for rising interest rates, historically the play is as below:

Outperformers when interest rates rise – financials incl banks and insurers, consumer discretionary, and cyclicals (energy and resources) and to a lesser extent defensive sectors like industrials, consumer staples (food & beverage) and telco’s.

Underperformers when interest rates rise – Utilities, transport, real estate and healthcare stocks.

Not surprisingly the above has played out more in the US than locally over recent years given their economy is stronger and rates are rising e.g. over the last 12-months the S&P500 is up +16.4% while utilities are down and real estate is only up +1.2% while consumer discretionary is +29% and financials +13%. Also, we should note that US stocks are rallying with interest rates rising because their economy is strong.

Australian 10-year bond yields Chart

Presently MM is holding a reasonably large 18% cash position, not too damaging when the index has rallied just over 1% over 8-months but not a good long-term option as todays first chart illustrates.

We currently feel there’s a good possibility that Septembers seasonally weak reputation will provide some solid buying opportunities below 6000 but two points are important to keep in mind: 

  1. MM has no interest in chasing high value / growth stocks at this stage of the market.
  2. MM will buy individual stocks at attractive prices even if the ASX200 does not correct as hoped.

We saw a property bubble inflate over recent years with unsustainable optimism final “pop” mid-last year and start to slowly deflate, around 15% is my best guess for Sydney. Equities in my opinion are more surrounded with pessimism than optimism, plus in the GFC stocks did not peak until 2-years after property i.e. we are not scarred to buy good companies at the “correct” price.

ASX200 Chart

1 The Financials Sector

This is by far the largest sector comprising of over 30% of the ASX200 and it includes the banks, asset managers and insurers – as a group the sector yields close to 6% but it’s down -5% over the last year. The underperformance of our banks in particular is the reason the ASX200 is languishing well below its pre GFC high i.e. the big 4 banks alone make up 21% of the local index.

The financials remain in the middle of their trading range since the March 2015 high, technically we are neutral, but our “Gut Feel” is we could potentially see a test of the early 2016 low, around ~10% lower. As we all know the sector has been hammered by the Hayne Royal Commission with the insurers the latest to be under the spotlight helping Suncorp (SUN) fall -3.7% last week.

Banks – The banks appear to have largely moved on from their regulatory issues but we feel it’s a sector to only consider into decent weakness, not strength. MM holds 27% of the Platinum Portfolio in the “big 4” banks, i.e. overweight.

Diversified Financials – This group of stocks has experienced a very different 12-months with the ASX (ASX) and Macquarie (MQG) both up over +20% while Perpetual (PPT), AMP Ltd (AMP) and IFL Holdings (IFL) are down over -20%. MM holds 5% in Janus Henderson, the cheapest of the asset managers on paper while we also have a position in Perpetual in the income portfolio with a 4% weighting.

Insurers – Over the last year the insurers have rallied over 8%, mirroring the ASX200. We have a 12% exposure in the MM Platinum Portfolio through Suncorp (SUN) and QBE Insurance (QBE) – we are considering reducing the SUN position further into strength although concede this would have been a sensible move a week ago!

  • MM currently holds 44% of the Platinum Portfolio in the financial sector which fits our macro view of rising interest rates / bond yields, assuming central banks don’t push too far creating a recession, but it’s a pretty aggressive weighting and more likely to be slightly trimmed rather than increased.

ASX200 Financials Sector Chart

2 Materials / Resources  Sector

This is the second largest sector comprising of almost 17% of the ASX200 – as a group the sector now yields over 4% and is up over +7% over the last year.

Historically the resources sector performs ok as interest rates increase because its indicative of economic growth, rising inflation and hence commodity prices. However since May the resources sector has fallen over 10% following the concerns around the emerging markets / US – China trade war, with many of the individual stocks correcting far deeper e.g. RIO Tinto (RIO) -20.6%, OZ Minerals (OZL) -24% and Western areas (WSA) -43%.

At this stage we don’t think the sabre rattling by Trump & China is finished plus the Chinese RMB looks poised to spike to fresh decade lows – a move that has rattled equities before and hence could again if only over the short-term.

MM currently only holds 9% of the Platinum Portfolio in the sector through Newcrest (NCM), RIO Tinto (RIO) and Mineral Resources (MIN).

  • MM is looking to increase its resources exposure with stocks like BHP, OZL, WSA and RIO all on the radar to buy /add.

ASX200 Materials Sector Chart

3 Health Care Sector.

This is the third largest sector comprising of almost 10% of the ASX200 – as a group the sector now yields just under 1.5% and is up an impressive +43% over the last year.

We believe the “easy money” has been well and truly made from the sector but we are not adverse to buying quality stocks at the right price e.g. over recent weeks CSL has corrected over 11%.

MM holds 6% of the Platinum Portfolio in the sector through Ramsay Healthcare (RHC) and Healthscope (HSO) and is hence underweight.

  • MM is comfortable being underweight the sector

ASX200 Healthcare Sector Chart

4 Industrials Sector.

This is the fourth largest sector comprising of over 8% of the ASX200 – as a group the sector now yields just under 1.5% and is up an impressive ~43% over the last year.

There is a wide mixture of stocks in the sector from Brambles (BXB) , CIMIC (CIM), Cleanaway (CWY), Seek (SEK), Transurban (TCL) and Sydney Airports (SYD).

A number of its members are in the “yield play” group of stocks who are likely to underperform noticeably if global bond yields continue to rally i.e. our view. Technically we are bearish the overall sector believing the next 10% is more likely down than up. 

  • MM has no interest in some parts of the industrial sector, however it does house a very diverse collective of stocks so we will likely venture here at some stage in the future

ASX200 Industrials Sector Chart

5 Consumer Staples Sector.

This is the fifth largest sector comprising of over 7.5% of the ASX200 – as a group the sector now yields just under 3.4% but is up a solid 18% over the last year.

The sector also comprises a diverse group of stocks like A2 Milk (A2M), Treasury Wine (TWE), Bellamys (BAL), Costa Group (CGC) plus supermarkets Woolworths (WOW) and Wesfarmers (WES).

We believe probably more than any other sector this is the one where specific stocks should be considered with less attention on the underlying sector. MM currently holds 3% of the Platinum Portfolio in the sector via A2M i.e. about half weighting.

  • We are comfortable with our relatively small exposure at this point in time preferring the resources for a sector play at this point.

ASX200 Consumer Staples Chart

6 Real Estate Sector.

This is the sixth largest sector making up 7.5% of the ASX200 and is actually the newest sector to enter the group.

Technically the sector looks capable of making a fresh post GFC high but we would be sellers of this breakout.

  • Both fundamentally and technically MM has no interest in the real estate sector.

ASX200 Real Estate Sector Chart

7 Energy Sector.

This is the seventh largest sector comprising just under 6% of the ASX200 – as a group the sector now yields just under 2.2% and is up an impressive +30% over the last year.

Its overall been a volatile month for the sector with Santos (STO) up 9% while Origin (ORG) is down -14%. At MM we have no exposure to the sector after having taken profit on our Woodside (WPL) holding too early.

  • MM is neutral the energy sector and sees no reason from a risk / reward perspective to chase into major technical resistance.

ASX200 Energy Sector Chart

8 Consumer Discretionary Sector.

This is the eight largest sector comprising of 5.5% of the ASX200 – as a group the sector now yields 3.4% and is up a solid 16.5% over the last year.

Another sector that comprises a very varied group of companies including Domino’s (DMP), oOh!media (OML), Nine Entertainment (NEC), Flight Centre (FLT), Harvey Norman (HVN) and Webjet (WEB).

We should not forget that this has been the most bullish sector in the US over the last 12-months and any signs that housing prices are again rising and / or household debt is falling should be a catalyst to jump into the consumer discretionary space. MM has no exposure to the sector at this point in time.

  • We are neutral at this stage but will be interested buyers 5-6% lower if the above economic changes become evident

ASX200 Consumer Discretionary Sector Chart

9 Information Technology Sector.

This is the ninth largest sector comprising of 3.4% of the ASX200 – as a group the sector now yields just under 1.3% but it’s up an impressive +35% over the last year.

A relatively small sector with some “kick ass” performers in it e.g. Computershare (CPU), Xero (XRO), NEXTDC (NXT), Afterpay (APT), REA Group (REA), WiseTech Group (WTC), Appen (APX) and Carsales (CAR). Obviously this group of stocks largely falls into the high valuation / growth basket which we are now concerned around at this stage of the cycle but at the correct level a number of them may become interesting.

Technically we can easily see another 8-10% downside for the sector but it would then become interesting for a more short-term aggressive play.

  • MM likes the sector ~8% lower and will consider 1 or 2 forays if this unfolds.

ASX200 Information Technology Sector Chart

10 Telco Sector.

This is the tenth largest sector comprising of over 3% of the ASX200 – as a group the sector now yields just over 4% but it’s down -5.8% over the last year.

MM is overweight the sector holding 7% of our Platinum Portfolio in Telstra (TLS) and 5% in the Income Portfolio and although our entry was a touch early its now showing a profit.

  • MM likes our position but will consider taking all / part profit into strength of  ~6-8% higher.

ASX200 Telco Sector Chart

11 Utilities Sector.

This is the smallest of the 11 sectors making up just under 2% of the ASX200 – as a group the sector now yields just over 5.5% but it’s down -8.2% over the last year.

This is a small sector comprising the likes of APA Group (APA), AGL Energy (AGL) and Spark Infrastructure (SKI).

MM holds no exposure to the sector and technically it looks destined to fall another ~6-7%.

  • MM has no interest in the Utilities Sector either fundamentally, or technically.

ASX200 Utilities Chart


As subscribers know we are looking for a more  defensive portfolio at this point in time i.e. stocks that should be more robust regardless of the state of the overall stock market.

Of the 11 sectors within the ASX200 below is  a summary of our views:

  1. Financials remain overweight.
  2. Resources – look to move overweight into current weakness.
  3. Healthcare – comfortable for now however there may be some opportunity to increase to market / slight overweight into decent weakness
  4. Consumer Staples, market weight feels ok.
  5. Consumer Discretionary – look to buy around market weight ~6% lower.
  6. Information Technology – look to move to market weight around 8% lower.
  7. Telcos’ potentially reduce our large overweight position 6-8% higher.
  8. No interest in Industrials, Real Estate, Energy and Utilities.
  • If / when some of these sectors start moving as outlined above MM will evaluate individual stocks in more detail through our AM reports.

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.

Have a great day!

James & the Market Matters Team


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.


All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 15/09/2018

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