Market Matters Report / Market Matters Weekend Report Sunday 24th March 2019

By Market Matters 24 March 19

Market Matters Weekend Report Sunday 24th March 2019

Market Matters Weekend Report Sunday 24th March 2019

The ASX200 managed to close up 20-points last week which was a pretty average effort considering the positive leads from global indices prior to Friday night. The influential Banking & Financials sector started to come off the boil while Healthcare and the Software & Services sectors remained strong -  but overall it was a quiet week on the index level which only traded in a tight 1.5% range. However under the hood we did see some fireworks and avoiding the markets “hand grenades” was arguably the most important game in town, within the ASX200 we saw:

1 – Winners – only 4 stocks rallied by more than 5% with 3 of these in the strong Healthcare sector.

2 – Losers – we saw 4 stocks fall by over 5%, 2 by over 10%, 2 over 20% and one over 50%! – the culprits came from a variety of sectors.

The stock market and human psychology can be a funny combination as we witnessed last week when 3 pretty major warning signs were ignored by many investors.

1 – The S&P500 rallied to a fresh 2019 high on Thursday night, following the Feds very dovish stance, but the ASX200 remained well below its earlier March high as the local market lost upside momentum.

2 – The small cap US Russell 2000 Index, which MM believes is regularly the best leading index for US stocks, remained 2% below its February high last week even while other indices rallied. Then it plunged 3.6% on Friday to close 6% below its 2019 high.

3 – The ASX200 remains rich compared to historical valuations increasing the long term risks of investing in many sectors at current levels – stock selection is especially important when markets appear “fully priced”.

Today’s report will again focus on the economic news which is slowly pointing to a US recession in the next 12-months and subsequently most importantly where we should be invested for the best risk / reward returns.

We are now holding an aggressive 28% and 13% cash positions respectively in our Platinum & Income Portfolios, hence we are in a strong position if the market continues to correct from current levels.

ASX200 Chart

On Friday night the US market plunged around ~2% depending which index is your focus while Europe equities suffered a similar fate with 2 reasons being cited for the aggressive days sell-off by stocks:

1 – US recession warning indicators have started flashing amber as 3-month Treasury Bill yields rallied above long dated 10-year bond yields for the first time since 2007. While the more closely watched 2 and 10-year bonds have not yet inverted (higher shorter dated bond yields) it just looks like a matter of time as the chart below illustrates.

2 – Weak German manufacturing data added to the global negative economic landscape.

While a recession usually follows around 12-months after bill / bond yields invert equity markets position themselves well in advance if they believe the “R” word is looming on the horizon – just remember December’s plunge by global stocks when markets decided the Fed’s hawkish aggressive raising of interest rates was going to push the US into an imminent recession. Arguably Fridays reaction was more concerning because its implying the US is going into a recession even as the Fed sits on its hands.

MM is concerned that the US market has fallen after the theoretically market friendly about turn by the Fed to a dovish stance. The US Fed is now expecting zero rate hikes in 2019, one in 2020 and none in 2021 – they are clearly concerned of a recession looming on the horizon as opposed to inflation. When a market falls on good news alarm bells should be ringing.

US 2-year & 10-year bond yield Chart

The chart below shows that Australian bond yields again made fresh 2½ year lows last week and they are now only marginally above their all-time lows while US 3-year bond yields are ~1% above their all-time lows. Scarily on Friday we saw German 10-year bond yields fall below zero for the first time since 2016, I for one thought we had seen the end of the post GFC incredible phenomenon of negative bond yields – got that one wrong!

We should all remember that stocks have rallied strongly since the GFC on a diet of cheap money and QE, its a dangerous game to forecast this time will be different but after the strong surge by equities since December a decent correction is normal price action for any market.

The main question is do we jump on board the defensive train or look to fade the current negativity that’s hitting economically facing sectors like building and retail.

We will look at a few specific sectors / stocks later but one thing MM is comfortable with is our call of increased volatility in 2019 / 2020 – Fridays 460-point tumble by the Dow sent the US Volatility Index (VIX) soaring 20% higher in quick fashion.

MM does believe that Australian interest rates will fall to fresh all-time lows in 2019 hence stocks paying sustainable yield should remain attractive.

Australian & US 3-year bond yields Chart

Short-term equity markets are finally wobbling as we have been anticipating for a while but we must put things into perspective:

1 – The US S&P500 has only corrected ~11% of its advance from the December lows. Our eventual target over the next few weeks is around 2700 which is ~3.5% lower which would take the correction of this impressive advance to over 30% (of the December rally), a common pullback for stocks after strong rallies.

2 – Similarly the ASX200 is set to open down around 50-points on Monday but our initial target is below 6100, over 1.5% lower.

MM expects stocks to fall over the next 1-2 weeks but we will be looking to put a decent portion of our cash to work if / when selective opportunities arise.

US S&P500 Index Chart

Sectors & stocks that we are considering to buy & sell in the weeks ahead.

MM has been fairly active in he market recently with the below moves executed last week in the Platinum Portfolio and we’ve added brief explanations why:

Buys

1 – We added 2% to our Pact Group (PGH) holding because we think last week’s $65 million sell down in the company increases the possibilities of privatisation.

2 – We allocated 3% of our portfolio to Healius (HLS) because we believe around $2.62 the price is not a fair reflection of the possibility of Jangho takeover bid at $3.25, or higher, gaining some traction.

3 – We allocated 2% to Emeco Holdings (EHL) as part of our “dogs” turnaround position.

Sells

1 – We took a ~20% profit on our 4% QBE position because of the headwinds to the business from falling bond yields plus our medium-term bullish outlook for the $A.

2 – We reduced our position in National Australia Bank (NAB) by 4% as we were overweight a stock that is likely to come under pressure if Australia does experience painful recession.

MM is now holding 15 stocks in our Platinum Portfolio with allocations between 2% and 10%, with a  28% cash holding.

https://www.marketmatters.com.au/new-portfolio-csv/

Likewise in our Income Portfolio we have 16 positions between 3% and 7.5% plus a healthy 13% cash position, however importantly less than 50% is exposed to equities.

https://www.marketmatters.com.au/new-income-portfolio-csv/

Due to next week’s likely increased volatility in markets and hence the potential for MM to be busy we have only focused on stocks / sectors where we can see ourselves pressing the buy / sell buttons

1 Banks & Diversified Financials sectors

The banking sector has rallied over 10% since its December low but it remains the main culprit for the ASX200 trading well below its pre-GFC all-time high. We have slowly become concerned that the bounce in the banks is running out of steam as a further deterioration of housing and overall economic picture is starting to weigh on the sector. We are glad we reduced our NAB position and are considering a similar move with Commonwealth Bank (CBA).

Fundamentally the risks to our banks are clear to most and we saw in the US on Friday night the financials get hit -2.8% as recession concerns escalated. If we were investing in Westpac (WBC), whose graph is shown below, purely technically we would now be square hoping to go aggressively long between $22 and $23 – not miles away when you consider they trade ex-dividend around 94c fully franked in May. Hence we are considering reducing our banking exposure still further so we can buy such a move if it eventuates – we rate it a 30% chance, not insignificant.

MM is considering reducing our exposure to CBA around current levels – watch for alerts.

Westpac Bank (WBC) Chart

We still haven’t found anything particularly exciting in the financials space, even after Platinum plunged almost 20% last week following the sell down by the Neilson’s. Perpetual (PPT) looks positioned to correct a further 5% and Challenger (CGF) needs to be well under $7 before we anticipate showing any interest ~10% lower.

MM is currently long Janus Henderson which looks good assuming we eventually receive some good news around a BREXIT resolution although its likely to gap lower on Monday like the majority of the market.

Challenger (CGF) Chart

2 Materials / resources sector

This is a sector that’s enjoyed a few great years, for good reason, but the market feels “long” and we may get a sharp correction over the next few weeks – BHP is poised to open down ~80c / over 2% on Monday, following in the footsteps of the US where the materials sector was the weakest on the boards falling 3%.

This is probably the sector where we have the most interest into a decent pullback with a number of names on the list:

1 – Sims Metal (SGM) – around $10.60, only 2.7% lower, this may easily be reached next week.

2 – Fortescue Metals (FMG) – below $6, ~10% lower, leaving $$ to average around $5.50 if the opportunity occurs in this volatile stock.

3 – RIO Tinto (RIO) – similar to FMG, look to buy around $87, or over 7% lower. NB we would only consider one of FMG or RIO.

4 – Western Areas (WSA) $2.26 – look to buy below $1.80, or over 20% lower but don’t discount the target area as this can be a very volatile stock - its still ~50% below its 2018 high.

Sims Metal (SGM) Chart

Now moving on to the building names within the Materials sector where the story has been very different – over last year we have seen Adelaide Brighton (ABC) -29%, Fletcher Building (FBU) -20%, Boral (BLD) -38% and CSR Ltd (CSR) -37%. The building sector has clearly been voting with both feet that a construction led economic slowdown was almost inevitable and going to be very painful but we are now pondering when the pessimism will become too stretched and bargains will be on offer.

The total declines in these sector illustrates perfectly how equities usually lead economic fundamentals hence don’t be scarred to buy when things look awful but simply show sensible respect to risk / reward – from their highs the total declines in these stocks has been extremely painful for loyal investors over recent times i.e. Adelaide Brighton (ABC) -41%, Fletcher Building (FBU) -57%, Boral (BLD) -44% and CSR Ltd (CSR) -55%.

MM is looking to buy new 2018 / 9 lows in probably 2 of these names, at this stage we like well-known names Boral (BLD) ~$4.25 and CSR Ltd (CSR) around $2.50 – in both cases well below Fridays close but never say never in stocks that have endured such a tough time. For the first time in a few years the building / construction influenced stocks as a group are in our watch basket.

Boral Ltd (BLD) Chart

A quick look at the gold names which enjoy low interest rates / bond yields. Its been a choppy 2019 for the sector and we intend to remain fussy targeting lower levels.

MM likes Northern Star (NST) around $7.

Northern Star Resources (NST) Chart

3 The Healthcare Sector

This is currently a sector we are fairly neutral although fundamentally it’s in the box seat for the fresh dovish stance by central banks, although a the sector level  it still fell -1.8% in the US on Friday night when only the bond like Utilities managed to close in the green.

However, we do still like Aged Care operator Estia Health (EHE) but the ship has clearly sailed from when we first discussed the stock last week.

MM will evaluate the next 20-25c pullback in EHE.

Estia Health (EHE) Chart

5 Retail and Real Estate sectors

I know a few fund managers who put their hand up and bought Lend Lease recently as a recover story, like the building stocks mentioned earlier I believe they went too early.

MM likes LLC into new lows potentially around $10 – but not yet.

Similarly the retail sector still looks likely to have a final “spit” to the downside – see our “Chart of the Week” later on Automotive Holdings (AHG).

Lend Lease (LLC) Chart

Updating our “shopping & potential selling list”.

This week we covered our likely actions in detail throughout the report. As always - Watch for alerts.

Conclusion

We remain mildly positive medium-term targeting a choppy advance through Q1/Q2, it feels like the chop to the downside has commenced but we will look to buy this weakness.

We continue to see MM being active moving forward with our “buyers hat” now in place as we sit relatively cashed up in both the Platinum and Income Portfolio’s.

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 quarters.

Sustainable dividends are likely to be on many fund managers menu as we head into Q2 of 2019.

Chart of the week.

We’ve  been very patient with our call to buy the automotive dealers stock AHG but there feels a strong likelihood that it will bottom around the same period as the building stocks like CSR and Boral i.e. when pessimism to the Australian consumer hits a crescendo.

At this stage that panic looks to be further down the track but this is the time to start laying at least mental traps – MM will be looking for a catalyst to buy AHG into fresh lows below $1.39.

MM is still bearish AHG with a potential target ~$1.25.

Automotive Holdings (AHG) Chart

Investment of the week.

We’ve  followed our plan of investing small % positions into a number of recent underperformers, who we have rudely named “dogs”, to-date these forays comprise of Emeco Holdings (EHL), Costa Group (CGC), Pact Group (PGH) and Bingo (BIN) – currently looking as the position as one holding its basically at breakeven although Monday might be a test.

We are currently considering averaging a couple of these holdings into any decent weakness plus adding one final member, Elders (ELD) which has been hammered by a combination of droughts and floods i.e. the extreme Australian weather.

MM likes ELD into current weakness.

Elders Limited (ELD) Chart

Trade of the week.

Fortescue Metals (FMG) was also our “Trade of the week” in  the previous report but as a sell around $7. This looks to have been on the money with FMG falling  over 9% after touching $6.96. Today we are looking at levels where we want to buy:

MM will turn bullish FMG below $6 area.

Fortescue Metals (FMG) 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 23/03/2019

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