Market Matters Report / Market Matters Weekend Report Sunday 17th March 2019

By Market Matters 17 March 19

Market Matters Weekend Report Sunday 17th March 2019

Market Matters Weekend Report Sunday 17th March 2019

The ASX200 struggled last week, especially compared to global equities with the local index falling -0.45% while the US S&P500 and EuroStoxx 50 rallied +2.9% and +3.1% respectively. Our market is almost being almost ripped in two depending on how companies are impacted by the heavily indebted  Australian household and subsequent slowing consumer spending / falling housing prices while on the flip side short-term local bond yields continue to fall with the 3-year bond yields making fresh 2 ½ year lows last week ~1.5%.

Todays report will focus on our 1-2 year outlook for the Australian economy, including interest rates, while evaluating the respective market sectors where we want exposure both now and moving forward e.g. last week we saw the a number of the Real Estate stocks perform strongly, with some like Mirvac (MGR) making fresh all-time highs, whereas the Consumer Services stocks had an awful time with the average decline across the 13 stocks in the sector being over -3.2%.

Below is an updated view of how we see the local index unfolding into 2019:

1 – My preferred scenario is for the ASX200 to pullback towards 6050 ~2% lower, however if we do first see a “pop” towards 6300 I feel it will most likely represent the completion of the rally from Decembers low and hence an excellent short-term selling opportunity.

2 – On the stock level the theme remains largely the same i.e. few equities look good risk / reward buying just here, as opposed to being more interesting a few % lower which ties in with point 1 - i.e. we are buyers 2% lower and sellers 2-3% higher, in other words MM anticipates a few weeks of range trading as opposed to major moves in either direction.

3 – We remain net 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. While the decade old bull market is maturing it may easily continue to climb the wall of worry well into 2020.

At MM we are currently neutral the ASX200 while still looking to buy a few selective stocks a few % lower, plus a couple just here.

We are now holding 27% and 5.5% cash respectively in our Platinum & Income Portfolios, with a 2% allocation into Emeco Holdings (EHL) in limbo which is discussed later.

ASX200 March SPI Futures Chart

The Australian economy continues to struggle however optimistic the RBA’s rhetoric although they have acknowledged concern if the deteriorating local property gets much worse. However things can easily get worse, todays Financial Review is now suggesting that ~450,000 people in Sydney / Melbourne are sitting on negative equity with the number very capable of increasing further.

Unlike the stock market’s sharp 3-month recovery from Decembers low any bounce / levelling off in property prices is likely to take far longer to unfold. The bureaucrats who have engineered a significant portion of this fall, with their aggressive tightening of credit while making it tougher for foreign investors to buy in Australia, have very little at their disposal to arrest the price declines, especially with the RBA Cash rate already at the all-time historical low of 1.5%. I ponder if they are already regretting the aggressiveness behind their decisions.

We see the RBA cutting rates once in 2019 in an effort to stimulate consumer confidence but in our opinion its unlikely to have a major impact on our heavily property focused / influenced economy.

Hence we believe from a risk / reward perspective we should not assume that moving into 2020 the worst is behind us for businesses exposed to the Australian consumer and their high debt levels. Conversely companies that benefit from lower interest rates should continue to outperform. In other words at MM we don’t believe it’s time to press the contrarian button and buy for example the retail sector.

Australian RBA Cash Rate Chart

A number of people keep citing the healthy Australian employment numbers when discussing our economy but unfortunately we see a real risk to jobs over the next 18-months on at least 2 fronts:

1 – The huge plummet in home loan approvals suggests the construction industry, Australia’s 3rd largest employer, is set to contract significantly leaving many tradies struggling for the first time since I can remember.

2 – The decline in housing prices and large household debt levels is likely to lead to ongoing tough conditions in the retail sector, another large Australian employer.

The chart below shows that Australian bond yields made fresh 2 ½ year lows last week and they are now only ~0.17% above their all-time lows while US 2-year bond yields are ~2% above their all-time lows. This is why the Australian Dollar ($A) is languishing around 71c, over 35% below its 2011 high. I can hear a number of subscribers ask why we believe the next 10c for the $A against the $US is up not down, the answer is a combination of two things:

1 – We feel the $US is overvalued with economic optimism being too high, this is the main component of our view.

2 – The interest rate differential between Australia and the US will normalise in the years ahead eventually making the $A far more attractive against the $US than today’s ~71c area.

NB We still would not be surprised to see another spike by the $A under the psychological 70c area but we would be looking to skew our portfolio away from the $US if this occurs.

Australian 3-year bond yields Chart

Short-term equity markets are far tougher to forecast than longer trends due to the noise created by major economic and stock specific news. However  when we stand back and look at the MSCI World Index (not including emerging markets) a pullback to the ~17% rally feels overdue.

Ideally we will see a ~6% correction but a close below 2100 is required to trigger any sell signals.

MSCI World Index Chart

No change with our longer-term outlook for stocks,  when we stand back and look at the bigger picture things still look pretty good.

1 - Our preferred scenario for the US tech based NASDAQ remains a test of the 8000 area in 2019/2020, or another 10% higher moving forward.

2 - Our preferred scenario for the MSCI All World Index is around 15-20% higher, in other words we remain keen buyers of future weakness.

As we said previously this implies that stock markets 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 especially for our own RBA who are arguably commencing one of the most difficult journeys of all the respective central banks.

NASDAQ Index Chart

MSCI All World Index Chart

Firstly lets recap our economic & fundamental views for 2019/20:

1 – The Australian economy will struggle moving forward, hence we expect at least one interest rate cut by the RBA in 2019.

2 – We will continue see outperformance by the “yield play” stocks, especially over ones who rely on the Australian consumer.

3 – We remain bullish stocks into 2020 as they continue to enjoy the almost free money / QE global conditions but careful stock selection will be required to benefit from such an advance.

However it’s important to remember that stocks / sectors usually turn around 6-months before the underlying economic fundamentals.

Sectors that are catching our eye at MM.

Obviously not all stocks within a sector are aligned either fundamentally or technically but its certainly a great starting point for investigating where to invest our hard earned $$.

1 Banks & Diversified Financials sectors

The banking index may have rallied over 10% since its December lows but it clearly remains the main culprit for the ASX200 trading well below its pre-GFC all-time high.

We are slowly becoming concerned  that the bounce in the banks is running out of steam, especially as a further deterioration of housing will weigh on sentiment towards them - very importantly MM is overweight the sector.

Hence MM is considering reducing our large exposure to the sector into current strength – watch for alerts.

Similarly we didn’t find anything particularly exciting within the diversified financials where Perpetual (PPT) looks positioned to correct over 5% and Challenger (CGF) needs to be under $7 before we anticipate showing interest ~10% lower.

MM is currently long Janus Henderson with an initial target above $35, this looks very achievable if / when we finally receive some good news around a BREXIT resolution.

ASX200 Banking & Diversified Financials Indices Chart

National Australia Bank (NAB) Chart

2 Consumer Services and Telco’s sectors

Arguably a strange combination of sectors but they cover one area where we are invested and another MM is considering moving forward.

The Telco’s have endured an awful 5-years but we are now bullish the sector initially seeing another 5-6% upside from current levels. Hence we remain comfortable with our very overweight exposure to the sector via Telstra (TLS) i.e. the Telcos are 3.2% of the ASX200 but MM has 7% of our Platinum Portfolio & 5% of the Income Portfolio in Telstra (TLS).

TLS is regarded by many as a yield play, unfortunately much to their cost since 2014, but it should “hopefully” outperform in a dovish environment i.e. interest rates falling.

The consumer services sector has largely experienced a tough 6-months and we can easily see further downside for a sector that largely relies on the discretionary $$.

Hence we will remain patient with our foray in Star Entertainment (SGR) targeting an entry ~5% lower. A number of other stocks within the sector like Ardent Leisure (ALG), Flight Centre (FLT), Domino’s Pizza (DMP) and Corporate Travel (CTD) look very average technically which supports our view that its far too early to be chasing exposure to the Australian consumer.

ASX200 Consumer Services and Telco’s Indices Chart

3 Energy and Materials sectors

The very easy and obvious observation from the below chart is where one goes so the other follows which is easy to comprehend. From a risk / reward perspective neither sector looks particularly exciting but both remain on the bullish side of the ledger.

Moving forward MM will be evaluating individual stocks within the sectors on the own merits as opposed to following a sector specific opinion.

ASX200 Energy and Materials Indices Chart

4 Australian Healthcare and Software & Services Sectors

The Australian Healthcare Sector has been a stellar performer over the last 8-years but we’ve clearly seen some “wobbles” since August which have not been subsequently shrugged off as they have been by the Software & Services Index. Our view on the two indices are as follows:

1 – We now believe the Healthcare Sector may have lost its outperformance mantle for at least a few years, especially because it contains a high proportion of $US earners. MM will continue to consider the stocks within the sector on their individual merits but we anticipate being largely underweight in 2019 /2020.

2 – The Software & Services Sector has boomed since the GFC and it made all-time highs last week. We remain bullish the sector but not aggressively at the current area, we will continue to consider the stocks within the sector on their individual merits and anticipate being overweight at times in 2019 /2020.

ASX200 Healthcare Software & Services Indices Chart

5 Retail and Real Estate sectors

Two very different indices considering todays economic backdrop. Real Estate loves falling bond yields (interest rates) and we saw the index make post GFC highs last week whereas the Retail Index is well below its 2016 high. Our opinions on the 2 sectors are below although unfortunately neither lead to much likely action in the weeks / months ahead:

1 – The Real Estate Index is breaking up to fresh post GFC highs on the back of falling bond yields / interest rates. On balance we expect further upside from the sector but the risk / reward is not attractive either fundamentally or technically.

2 – The Retail Index is not surprisingly in the doldrums and some individual stocks have been hammered over the last 6-month e.g. Bapcor (BAP),  Premier Investments (PMV) and Automotive Holdings(AHG) are all down over 16%. However a classic capitulation style sell-off feels a distinct possibility considering the position of the Australian consumer, we are happy to remain patient anticipating some bargains moving forward.

ASX200 Retail and Real Estate Indices Chart

Updating our “shopping & potential selling list”.

As the market consolidates we continue to be selective on stocks and the respective levels where MM has interest:

1 – We like Star Entertainment (SGR) around $4.10 which still feels possible after the casino operator failed to rally above $4.50.

2 – We attempted to buy Emeco Holdings (EHL) on Friday but the stocks +6.4% rally left our buy level in dreamland – we have raised our buy level for EHL to $2.15.

3 – We like Medibank Private (MPL) around $2.70 but we are already long NIB hence an unlikely purchase.

Emeco Holdings (EHL) Chart

We’ve also updated and again 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. – plus hopefully EHL on Monday.

1 – Healius (HLS) under $2.65 i.e. now – watch for alerts.

2 – Elders (ELD) around $5.60, or ~7% lower.

Potential sells

1 – Reduce our banking exposure.

2 – Sell QBE around $13.

Conclusion

We remain mildly positive medium-term targeting a choppy advance through Q1/Q2, it still feels like the chop might be 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 in the Platinum Portfolio.

We believe stocks / sectors that benefit from lower interest rates as opposed to a strong Australian consumer will continue to outperform for at least a few months.

Watch for alerts.

Chart of the week.

MM has a penchant for trying to buy turnaround stories but sometimes it’s the ones you let go through to the keeper that help generate the best returns at the years end.

Last year we heard the renewable energy company Infigen (IFN) was hunting for a buyer according to The Australian newspaper plus the stock / sector has political uncertainty as Mays elections looms - it’s all too hard at this stage in our opinion.

MM is bearish IFN with a potential target sub 40c.

Infigen Energy (IFN) Chart

Investment of the week.

In late January GUD Holdings (GUD) disappointed the market when it announced a half-year net profit just below $30m, only up 3% from the same time the previous year. However the NPAT was better with the Automotive division kicking the goals.

The companies trading on an ok valuation while yielding 4% fully franked.

MM likes GUD at current levels with stops below $12.50, good risk / reward.

GUD Holdings (GUD) Chart

Trade of the week.

Obviously Fortescue Metals (FMG) has enjoyed the almost 50% rally by iron ore following the Vale disaster in Brazil which when combined with an excellently run business has resulted in excellent share price gains. However all things have value and if FMG spikes up towards $7 in the next few weeks we believe it will represent a good selling opportunity for a pullback towards $6, or 15%.

MM will turn bearish FMG around the $7 area.

Fortescue Metals (FMG) Chart

Iron Ore Active Contract 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.

Have a great day!

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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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 16/03/2019

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