Market Matters Report / Market Matters Weekend Report Sunday 17th May 2020

By Market Matters 17 May 20

Market Matters Weekend Report Sunday 17th May 2020

Market Matters Weekend Report Sunday 17th May 2020

The ASX200 continued to tread water last week finally closing up just 14-points with the inevitable few small spikes both up & down along the way. Banks were again the main drag on the index, even after a reasonable trading update from CBA, whereas the Resources and Healthcare stocks ensured we managed to finish the week in positive territory. This weekend most of us are entering Phase 1 of the return to normality with children back to school (sort of) and cafes / bars reopening albeit it in a very restrictive way, now it’s time to enjoy our increased freedom and hope COVID-19 infections don’t increase. Personally, I’m far more concerned about the US and to lesser extent Europe experiencing a secondary wave of outbreaks, similar to pockets of Asia – economically the world cannot afford to go back into lockdown.

Globally the reported number of cases is spiralling towards 5 million and over 300,000 people have lost their lives, Australia’s effort to keep the number of deaths to around 100 has been simply staggering. However, there is a second battle to be fought basically starting now and it’s the massive economic challenge. Almost 600,000 people lost their jobs in April courtesy of the pandemic with the statistic significantly flattered by the JobKeeper which is effectively paying 6 million people, many of whom will not have jobs when the government turns off the tap. This is another curve that Scott Morrison will be trying to flatten – the economic shock post the JobKeeper.

It’s extremely frustrating that the impact of the virus has been far worse on our stock market compared to say the US, yet we’ve kicked its proverbial butt! At least most importantly from a humanitarian & lifestyle perspective we’ve confirmed our position as one of the most desirable places on earth to live! No doubt President Trump will claim kudos for a relatively strong US stock market during his looming presidential campaign:

ASX200 – The local index initially plunged 39% and has only bounced 23%, remaining 25% below Februarys all-time high.

US S&P500 - The broad based US S&P500 index initially plunged a slightly smaller 35% but it subsequently bounced 31% to be only 15% below its February all-time high.

We’ve previously discussed the big FANG stocks driving the US outperformance earlier in the week i.e. Five of the FANG stocks which make up 20-25% of the S&P500 are up over 10% this year whereas the other 495 are down ~13% for the year. Simply the ASX like most of the global indices is missing out on the impressive 2020 gains from the likes of Apple (AAPL US) and Amazon (AMZN US).

On balance we feel global equities are pricing in a reasonable recovery from COVID-19 while enjoying the major tailwind of both aggressive monetary and fiscal stimulus. We feel prices are currently about right hence the more than 5-weeks of sideways choppy action but we don’t believe the potential risk of a return to lockdowns has been priced into stocks hence this is the current major risk to prices in our opinion, followed by ongoing trade  war risks as the blame game picks up steam.

ASX200 & US S&P500 Indices Chart

The ASX200 has been rotating between 5100 and 5563 for over a month with inevitable pockets of over and under performance under the-hood. Broadly speaking the heavyweight banks have struggled while the broader market has fared better. Time for one of my “Gut Feel” thoughts to what comes next – taking into account US markets starting to shrug off bad news, local stocks still finding plenty of cash for cap raisings, FOMO creeping into a few stocks / sectors plus the general look & feel of our resources sector I believe the local index is about to pop out towards 5600, I’m not convinced it will enjoy follow through considering the economic challenges ahead but it feels like it’s time to scale new levels.

MM is currently bullish the ASX200 both short & medium-term.

ASX200 Index Chart

The picture being painted by US stocks is similar to our own with a clear point of difference in terms of clarification on point 2 below. I’ve deliberately used the broad-based Russell 3000 Index below to limit the influence of the large cap FANG stocks, and hopefully provide a better reflection of what we might anticipate locally:

1 – Short-term: We are bullish US stocks in the coming weeks looking for fresh multi week highs, our best guesstimate is 6-8% higher. Similar to the ASX after an almost 7% pullback we anticipate fresh multi-week highs as the US market continues to shrug off poor economic data e.g. on Friday night we saw Retail Sales collapse -16.4% for April, much worse than the anticipated -12%.

2 – Weeks ahead: Assuming we are correct and the Russell 3000 rallies towards the 1750-1800 area it will take the recovery from March’s plunge to around 40%. Logic would say after such a strong recovery the global economy would need time to prove that it could improve enough from COVID-19 to justify being within striking distance of its February all-time high hence we will be looking to reduce market exposure into such a move – remember its time to “buy weakness and sell strength”.

I have illustrated this potential roadmap below, obviously markets are constantly evolving but we do particularly like the picture below because it ties in with human emotions that appear in play at this point of time.

US Russell 3000 Index Chart

The Junk Bond market remains significantly healthier than during the GFC, in other words the market is allowing many companies to raise capital through credit markets at accommodative interest rates (cost of capital). This is obviously assisted by Central Banks holding Official Interest Rates close to zero plus aggressive broad-based QE (quantitative easing – the US Fed is currently buying bonds and other assets to support the markets and economy after the pandemic). As we’ve mentioned before while the Fed and other Central Banks are flooding markets with liquidity / money it creates an extremely supportive environment for stocks.

In March I read a comment by Mark Cabana, interest rate strategist at Bank of America Global Research, which summed up perfectly how big the tailwind for assets including stocks appears to be:

Unlimited QE & emergency liquidity programs should see the Fed balance sheet double in size over 2020” – note the word unlimited!

The Corporate Bond market remains supportive of equities.

iShares High Yield (Junk Bond) ETF Chart

An uncertain equity market and huge Monetary & Fiscal stimulus has provided a perfect backdrop for gold which has continued its multi-year rally with a break above $US2,000/oz feeling almost inevitable. Jumping on board a strong market after its been rallying for a few months can be tough from a psychological standpoint and of course at times fraught with danger, especially if there’s a degree of FOMO (Fear of missing out) involved but in the case of gold we do wish we were long. The hardest decision has been / is what stocks to buy as the local sector continues to underperform many overseas peers e.g. over the last year Newcrest (NCM) is up +13%  compared to Barrick Gold which has soared over +50% and the Australian company is supposed to enjoy the weak $A!

We are donning our thinking hats with regard to this space but one “play” that is catching my attention is the local GOLD ETF which looks perfectly positioned to rally another 10-15% in the coming months – this is a $1.7bn local currency  denominated ETF which tracks the actual gold price hence it benefits from a weaker $A.

MM is bullish gold over the coming months / years.

Gold ($US/oz) Chart

Gold ETF Chart

Equity indices have again been steady, but we now anticipate a rally short-term before yet another pullback – it’s certainly been choppy of late. Hence we are in “buy mode” for now but will definitely be looking to take some $$ from the table if our roadmap proves correct. As active investors I have outlined a few plans below MM is considering to add alpha / value:

Potential Buys into weakness.

1 – Growth Portfolio: Following an initial “nibble” purchase of Alumina (AWC) and a “top up” of our Macquarie Group (MQG) position we now have 9.5% in cash. As mentioned, we are also considering adding to our Xero (XRO) position after its rapid 11% correction following last Thursdays report, ~$72.000 our preferred region.

Xero (XRO) Chart

2 – Income Portfolio : Last we week bought Wesfarmers (WES) which yields 4.1% and trimmed our Active Ardea Real Outcome Bond (XARO) leaving us fully invested which fits our current market view.

3 – International Portfolio : We still only hold 8% in cash which has left us pedantic on the buy side,  I have given a lot of thought to our most likely purchase next week and high flyer wins the prize, it’s been on our shopping list for weeks.

NB I know we expected to be “active” on Friday night but the S&P500 futures were already strong at 4pm AEST which negated the risk / reward leaving us more comfortable to reassess over the weekend. (AMZN US) Chart

4 – Global Macro ETF Portfolio : We remain bullish on the Invesco Bearish $US Index ETF (UDN US) plus we are now looking to gain bullish exposure to the Japanese stock market (Nikkei 225) via the $US9.1bn iShares Japan ETF (EWJ US).

Also we have switched some of our attention to gold ETF’s which are accelerating to the upside, we are looking for risk / reward buying opportunities.

Japanese Nikkei 225 Chart

Potential Sells into strength.

1 – Growth Portfolio : If we are correct and the break towards  5600 ++ unfolds in the weeks ahead for the ASX200 we will be looking look to reduce our market exposure but which stocks will depend on respective price action between now and then. Alternatively, we might simply maintain our portfolio mix and hedge via a negative facing ETF.

NB The BBOZ illustrated below is leveraged by around 2x and should be used accordingly.

BetaShares ASX Bearish ETF (BBOZ) Chart

2 – Income Portfolio: Again, we will reconsider our market exposure if we see stocks breakout to the upside.

3 – International Portfolio: We will again be looking to reduce our market exposure if we see stocks breakout to the upside – LVMH into strength remains one we are watching. Again, like the Growth Portfolio we might use a negative facing US S&P500 ETF like the BBUS, the US equivalent of the BBOZ from Betashares.  

4 – Global Macro ETF Portfolio : we are still considering taking a 10-15% profit on our NASDAQ QQQ ETF around the 230 area with a view to re-entering at lower levels plus we may also consider switching 100% around and buying a negative facing ETF a  mentioned above.

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.


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