Market Matters Report / Market Matters Weekend Report Sunday 19th May 2019

By Market Matters 19 May 19

Market Matters Weekend Report Sunday 19th May 2019

Market Matters Weekend Report Sunday 19th May 2019

How wrong can polling be?? Simply think Trump, BREXIT and now Scott Morrison! On Monday it will be business as usual for the ASX200 and everybody’s franking credits will be safe for at least a few more years. Monday’s report will focus on MM’s view of the market ramifications from the weekends surprise election result although perhaps it’s no surprise to some out there given the market certainly paid no attention, surging higher into Friday. Congratulations Scott Morrison – a massive victory.   

The ASX200 made fresh decade highs last week illustrating very clearly the fuel which is currently driving Australian stocks i.e. lower bond yields and the subsequent expectation of interest rate cuts by the RBA has clearly been outweighing the concerns around US-China trade and the prospect of a new Bill Shorten government (that was wrong anyway). However the +0.9% gains for the week was far from being evenly spread “under the hood” with the heavyweight financials falling while the resources & yield sensitive sectors rallied strongly. Both the local market and our friends across the Tasman have revelled in the increasingly dovish interest rate environment with the NZ50 again making fresh all-time highs last week, even as global indices struggled.

As we have said previously MM feels the “sell in May and go away” phenomenon might not come to fruition this year, or more than likely will simply be delayed – investors “feel” like they are slowly becoming more confident that stocks will go higher through 2019 /20 but our opinion is more balanced and we feel stocks are enjoying the perfect storm with generally ok / good company profits while Australian bond yields are at all-time lows but eventually something will crack and it’s our job at MM to monitor for signs – sounds easy!

1 – On Friday US consumer sentiment surged to its highest level in 15-years, I expect the President will quote this number during the week! However we question if things are so buoyant in the US why are bond yields and inflation remaining persistently low?

2 – Australian bond yields are factoring in at least two 0.25% rate cuts in the relatively near future as housing prices slump and even the stalwart employment numbers wobbled last week.

It feels like the gymnast (market) is walking along the balancing beam with inflation one side and a recession on the other, while it doesn’t fall off it’s the perfect environment for stocks but the most accomplished competitor does eventually slip up. Back in late 2018 stocks were slammed as investors thought that the Fed was going to raise interest rates too fast and push the global economy into a recession yet here we are today with stocks rallying as central banks have performed the perfect pirouette given global economies appear not to be strong enough to withstand previously flagged rate increases.

At MM we have no intention of “fighting the tape” which remains bullish but we are slowly evolving our currently bullish stance towards a more neutral outlook, hence don’t be surprised if we take some $$ from the table if / when the ASX200 rallies above 6400.

Short-term MM remains bullish the ASX200 while it can remain above 6350 with an initial technical target above 6425.

On Friday night US indices struggled to close the week out in the black as the S&P500 slipped -0.6%, at MM we are medium term bullish US stocks looking for another ~5% upside but the short-term feels far more tricky. Stock markets continue to factor in less than a 10% chance of the US - China trade talks failing and while we believe they are correct investors should not underestimate the downside for stocks if a full blown trade war does unfold.

ASX200 Chart

No change with the correlation between equities and bonds remaining fully intact – while bonds are firm, hence rates / yields low, equities are strong.  At MM we will continue to watch both domestic and global bonds closely for any signs that stocks may be losing the huge tailwind of “cheap money”.

MM believes stocks will remain firm until bond yields start to increase, or perhaps just plateau.

ASX200 v Australian 10-year Bonds Chart

US S&P500 v Junk Bond ETF Chart

MM has discussed the $A almost weekly since the start of 2019 but with the exception of interest rates it’s probably the most influential macro factor on the ASX200, especially for certain sectors that have revelled in the 8-year old tailwind of a declining $A.

If our medium-term contrarian outlook for the “Little Aussie Battler” is correct we are rapidly approaching an inflection point. Markets rarely paint the perfect picture but at this stage we are looking for another foray down towards 65-67c where we are likely to reduce our exposure to US earners e.g. in the Platinum Portfolio ResMed (RMD), Aristocrat (ALL) and Macquarie Group (MQG).

Our preferred scenario is the $A has one more look below its 2019 low for a buying opportunity.

Australian Dollar ($A) Chart

1 –  Platinum Portfolio

The MM Platinum Portfolio had a busy week with our cash position reduced to 14% following purchases of BHP Group (BHP), Iluka (ILU) and Macquarie Group (MQG)  https://www.marketmatters.com.au/new-portfolio-csv/. With the ASX200 knocking on the door of the 6400 area its very unlikely that we will increase our market exposure further, unless we offset holding with a negative facing ETF e.g. BBOZ.

Firstly, again the easy bit looking at our solid performers which are approaching our profit targets:

1 - ResMed (RMD) $16.45 : we are targeting the ~$17 area to take profit, now only ~3% away.

2 – Bingo (BIN) $1.80 : we have been targeting the $2.10 area but a break below $1.76 will send clear warning signals plus we will still be sitting on a healthy ~23% profit.

ResMed (RMD) Chart

Secondly, let’s consider the stocks / sectors which weighed on both the MM Platinum portfolio and ASX200 last week, the high-yielding influential banks. ANZ, NAB and Westpac all traded ex-dividend last week however they all fell far more than their respective payouts, in fact between 6% and 7.8%, comparatively CBA  which traded ex-dividend in February was down 3.4%.

MM is currently holding 8% of our Platinum Portfolio in CBA, NAB and Westpac plus 5% in Bank of Queensland and 3% in Macquarie Group – our intention is to tweak these lower into the EOFY.

MM is looking to reduce our banking exposure in the weeks ahead.

Commonwealth Bank (CBA) Chart

Thirdly, stocks / positions we are considering buying in the weeks ahead, we continue to look for stocks that can “pop” higher as they return to favour a phenomenon we have witnessed a number of times in 2019.

1 – Worley Parsons (WOR) $14.33 – WOR fell hard last October following its $33bn accusation of Jacobs Energy, and subsequent cap raise but we believe 6-months down the track its catch up time; buy around $14 targeting above $20 with stops under $13.20 – excellent risk / reward.

2 – Bear ASX200 ETF (BBOZ) over the next few weeks we can see MM taking a position in this ETF to hedge our overall market exposure, similar to our plays with negative facing ETF’s in December of 2018.

Worley Parsons (WOR) Chart

Leveraged Bearish ASX200 ETF (BBOZ) Chart

3 – Gold Sector – we are keen to accumulate gold stocks into weakness but even when the precious metal drifts lower its decline has been offset by the falling $A, the chart below illustrates gold making fresh multi-decade highs in $A terms.

The current underlying strength in the sector was demonstrated on Friday when St Barbara (SBM) came back onto the boards following its successful $355m capital raise from institutions, with an additional $135m to follow from retail investors, but gold stocks were largely unchanged on the day e.g. Newcrest (NCM) +0.3% and Northern Star (NST) -0.5%, i.e., the large capital raise by SBM did not detract from the markets underlying appetite for stocks exposed to the precious metal, even if SBM did trade below the raise price.

However our clear concern is the $A, if we are correct and its close to major inflection point any rally in the gold price is likely to be dampened by a declining Aussie.

Gold in $A Chart

2 Income Portfolio

The Income Portfolio  https://www.marketmatters.com.au/new-income-portfolio-csv/  now holds 15% in cash following our purchase of RIO Tinto (RIO) – we believe RIO is very capable of increasing dividends overall or paying a special at some point, especially as they sit on a huge franking credit balance in excess of $8bn.

Technically RIO looks excellent targeting fresh highs around $105 – again, remember there’s nothing wrong with buying stocks near their highs, statistically it works.

RIO Tinto (RIO) Chart

3 –  International Equites Portfolio

Repeating what we said last week “We remain bullish global equities but the “easy money” on the long side feels well and truly behind us hence our construction of an international portfolio is going to be a careful process.”

President Trump has thrown some China related trade volatility into the mix in the last few weeks which has left us a touch 50-50 on what comes next in the short-term:

1 – On balance the small cap Russell 2000 looks ideally positioned to correct another ~4% making chasing US and overseas stocks feel a touch premature.

US Russell 2000 (small cap) Index Chart

2 – The Emerging Markets Indices look capable of falling another 10% implying there will be no “quick fix” solution to the US – China trade talks.

Hence we see no reason after the last week of trading to jump “boots and all” into overseas stocks but as always there will always be bargains / value to be enjoyed.

Emerging Markets ETF (EEM) Chart

Following the decent correction by a number of quality stocks courtesy of President Trump we’ve refined our picks down to 2 stocks that we would buy at today’s levels (see this weekend’s Chart Pack)

1 – Alibaba (BABA) closed at $US169.57 on Friday, we like the current pullback, especially into any further weakness with an ultimate target around $US220.

2 – Trade Desk (TTD US) is a slightly smaller company albeit with a growing $US8,817m market cap, we remain bullish targeting ~$US250.

Watch for the launch of the MM portfolio in the next few weeks but we will play our way in slowly unless the market has a deeper correction in May / June.

Trade Desk (TTD US) Chart

4 - MM Global ETF Portfolio

As touched on last week for the first time, this is a new concept to MM but this portfolio will replicate our macro opinion primarily around global stock indices, different market sectors, interest rates and currencies – this can very often be played by investing in ASX listed ETF’s but when required we may also turn to overseas listed ETF’s. We have regularly discussed our views across these economic themes and its time to put theory into practice. Below is a list of Australian ETF’s updated at the end of February this year:

https://en.wikipedia.org/wiki/List_of_Australian_exchange-traded_funds

We reckon there are a couple of great scenarios worth considering and preparing for:

1 – A potential spike towards 65c by the $A as touched on earlier will represent great risk / reward buying in our opinion.

2 – Sell Emerging markets v buy the ASX200 equal dollar exposure BUT this is already very stretched hence we would be implementing on say 50% usual size. Then later buy the Emerging Markets ETF if / when it makes fresh lows for 2019 – see second chart above for EEM.

ASX200 v Emerging Markets ETF (EEM) Chart

3 - Consider short Equity ETF’s into fresh 2019 highs.

Above 6425 for the ASX200 and above 3000 for the US S&P500 we are likely to become bearish equities hence we could / may buy the BBOZ or BBUS but we may still be bullish gold (QAU) or the Resources (QRE) hence we can create a mosaic of positions which at times have limited exposure to the underlying index itself as opposed to which sectors outperform – an exciting prospect for all at MM.

BetaShares Leveraged Bearish S&P500 (BBUS) ETF Chart

Conclusion

Short-term stocks look ok but as the ASX200 advances we are slowly switching from a bullish to neutral stance, ideally our first tweak to portfolios will be to reduce our banking exposure.

Chart of the week.

MM has been bearish QANTAS for months and the story is still playing out with our ideal target over 10% lower.

If this call proves to correct it implies that the crude oil price will be strong into the next financial year, a theme which ties in with our bullish opinion on BHP and  WorleyParsons.

MM is bearish QANTAS targeting $4.50.

QANTAS (QAN) Chart

Investment of the week.

Intellectual property services firm is not often talked about although its pretty topical considering discussions between the US & China. Short-term we can see a pop above $7.50, then we will have the Sydney company on alert to see if it can maintain its momentum. Worth noting , there is a fairly complicated takeover tussle playing out in the patent space which will have an influence for the next month or so on IPH and the sector more generally.

MM is bullish IPH targeting fresh 2019 highs in the next few weeks.

IPH Ltd (IPH) Chart

Trade of the week.

We have talked about our positive outlook for the Energy Sector through most of todays report and arguably one of the best stocks to play these thematics through is Woodside Petroleum (WPL) which is trading on a conservative Est. P/E of 13.9x for 2019 while yielding 5.4% fully franked.

MM is bullish WPL targeting a break above $40.

Woodside Petroleum (WPL) 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.

Disclaimer

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 19/05/2019

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