Market Matters Report / Market Matters Weekend Report Sunday 26th May 2019

By Market Matters 26 May 19

Market Matters Weekend Report Sunday 26th May 2019

Market Matters Weekend Report Sunday 26th May 2019

The ASX200 again made fresh decade highs last week courtesy of the surprise Liberal election victory and further dovish rhetoric from the RBA, there’s not many folks in town who don’t now fully expect a 0.25% rate cut in June.  The “Big Four” banks led the charge with their average gain +8.4% while the less influential Retail sector was not far behind as investors backed the re-election of Scott Morrison to reinvigorate the Australian economy. Conversely on the other side of the ledger we saw the Energy, Resources and Software & Services sectors drag on the index as fears around US-China trade weighed on many  global markets.

We have mentioned previously that MM feels the “sell in May and go away” phenomenon probably wouldn’t come to fruition this year but more 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 equities are currently enjoying the perfect storm with company profits generally ok while critically Australian bond yields continue to make fresh all-time lows. Importantly at MM we have no intention of “fighting the tape” which remains bullish for now but we are slowly evolving our bullish stance towards a more neutral outlook, hence don’t be surprised if we take some $$ from the table if / when the ASX200 rallies back above 6500.

Markets regularly like to move in the direction of most pain and at this stage this still appears to be up, just consider the following numbers taken from the most recent Bank of America Fund Managers survey i.e. 250 managers surveyed managing $US687bn:

1 –  34% of fund managers have taken out protection against a fall in stocks over the next quarter, the largest reading ever, amazingly a greater reading than during the GFC.

2 – Fund Managers have reduced their allocation to stocks by 6% to 11% although they remain  overweight.

Basically investors are relatively well hedged although a full blown trade war would clearly still hurt however as a rule news that is in the papers is not what creates the most damage. These are not the usual numbers for a top, we usually need more optimism and less cover on the downside which then enables the market to fall like a hot knife through butter.

Short-term MM remains bullish the ASX200 while it can remain above 6380 with an initial technical target above 6525.

On Friday night US indices closed mix with the Dow rallying while the tech based NASDAQ fell slightly. The SPI futures are calling the ASX200 to open unchanged while BHP closed up over 1% in the US following some rare strength in the $A.

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”. Last week local equities embraced the major boost of the RBA implying strongly they would cut interest rates next month:

1 – The RBA targeted cash rate currently sits at 1.5%, the lowest in history.

2 – Last week the Australian 3-year bonds fell to 1.084% while the 10-years hit 1.516%, again both at their lowest in history.

3 – Both of these bond yields imply that the RBA will definitely cut official rates twice in 2019 and potentially even lower below the psychological 1%.

4 – The RBA must be extremely happy that it can issue bonds / raise $$ for 10-years at around 1.5%, I wish I could.

It’s certainly easy to comprehend the attraction of the Australian banks today from purely a “carry” perspective – if you can borrow money at ~3% and buy NAB shares paying a ~7% fully franked dividend it looks pretty good from a risk / reward perspective.

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

ASX200 v Australian 10-year Bonds Chart

Last week the $A experienced both a push and pull effect with the coalition win being positive while the RBA’s rate cut talk was the negative, surprisingly to many the  $A finally closed the week up 1%.

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 enjoyed a solid week with a number of our positions rallying strongly with the Big Four Banks, Aristocrat (ALL), NIB Holdings (NHF) and Emeco Holdings all rallying well over 5% while the our relatively light resources holding was the main drag on the portfolio: https://www.marketmatters.com.au/new-portfolio-csv/

We didn’t transact during the week with our cash position remaining at 14% following the previous weeks purchases of BHP Group (BHP), Iluka (ILU) and Macquarie Group (MQG). With the ASX200 knocking on the door of the 6500 area its very unlikely that we will significantly increase our market exposure, unless we offset some holdings with a negative facing ETF e.g. BBOZ.

Firstly, again the easy part looking at our solid performers which are approaching MM’s profit targets:

1 - ResMed (RMD) $16.38 : we are targeting the ~$17 area to take profit, now only ~3% away.

2 – Bingo (BIN) $1.89 : we have been targeting the $2.10 area but a break beneath $1.85 will send clear warning signal after the stock hit $2 last week but we will still be sitting on almost a 30% profit.

3 – NIB Holdings (NHF) : we remain bullish targeting another 10% upside but after seeing a 14% advance last week never say never.

NIB Holdings (NHF) Chart

Secondly, let’s consider the stocks / sector which weighed on both the MM Platinum portfolio and ASX200 last week, the resources, with BHP Group (BHP), Ausdrill (ASL) and Orocobre (ORE) all ending the week in the red like most of the resources  / materials sector although the construction stocks like CSR and Brickworks did enjoy the election result!

As touched on last week MM is currently now holding 14% 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 with the resources and cash our likely target (s) hence were not too concerned by a short-term pullback in the sector.

MM is looking to switch part of our banking exposure into resources over the weeks ahead BUT we are in no hurry just yet.

BHP Group (BHP) v Westpac (WBC) Chart

Thirdly, stocks / positions we are considering buying in the weeks ahead, we continue to look for stocks that could “pop” higher as they potentially return to favour, a phenomenon we have witnessed a number of times in 2019. After last week’s structural changes for the market we have changed the list slightly:

1 – Fortescue Metals (FMG) – FMG paid out a huge 60c fully franked special dividend last week but we feel the continued surge higher by iron ore should again attract investors  back to FMG i.e. MM feels the recent $1.17 pullback in FMG is overdone and presents a buying opportunity.

2  - SmartGroup (SIQ) – a curly one that’s not everybody’s “cup of tea” the salary packaging business looks excellent technically with a target around $10.50, or 17% higher. The companies valuation is not scary trading on an Est P/E for 2019 of 14.2x while yielding 4.7% fully franked which feels sustainable following a 20c special dividend in April – we like SIQ  with stops below $8.20.

3 – Bear ASX200 ETF (BBOZ) over the next few weeks / months 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.

Iron Ore (CNY / tonne) Chart

SmartGroup Corp (SIQ) Chart

Leveraged Bearish ASX200 ETF (BBOZ) Chart

2 Income Portfolio

The Income Portfolio https://www.marketmatters.com.au/new-income-portfolio-csv/  now only holds 9% in cash following last week’s purchase of Flight Centre (FLT) and Whitehaven Coal (WHC).

We enjoyed a strong  week for our Income Portfolio with both the election result and RBA comments working in our favour leading to an impressive performance  by the time Wednesdays Income report was published of +2.18%.

Until we see any indications that bond yields have bottomed MM sees no major reason to reduce our large market exposure, or re-position / skew holdings towards lower rates.

Australian 3-year Bonds v RBA Cash Rate Chart

3 –  International Equites Portfolio

Our headline from last week was on the money - “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.” Especially as  President Trump has continued to throw significant US  - China trade volatility into the mix over the last few weeks which makes the short-term picture tricky from a risk / reward  perspective.

However our “best guess”  is the small cap Russell 2000 looks ideally positioned to correct another ~3% fall hence chasing US and overseas stocks feel a touch premature but only just.

US Russell 2000 (small cap) Index Chart

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 again see no reason to jump “boots and all” into overseas stocks, especially those Asian facing, but as always there will 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 3 stocks that we would buy at today’s levels:

1 – Trade Desk (TTD US) $US195.90 is a slightly smaller company albeit with a growing $US8,722m market cap, we remain bullish targeting ~$US250.

2 – JP Morgan (JPM US) $US109.71 -  JPM is only ~10% below its all-time high but we still see up to 20% upside in the months ahead.

3 – Samsung (005930 KS) KRW42,700 – we continue to like Samsung but stops would now to used below 40,500.

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

This remains 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 rhetoric into an actionable portfolio

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 –  Last week we said : “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. Well this kicked in hugely this week and we would lock in half profits had we implemented but overall we believe it has further to run.

ASX200 v Emerging Markets ETF (EEM) Chart

3 – No change, consider short facing Equity ETF’s into fresh 2019 highs.

Above 6525 for the ASX200 and above 3000 for the US S&P500 we are likely to become neutral / bearish equities hence we could / may buy the BBOZ or BBUS but also 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

No change, 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 long Orica (ORI) since November and the position has been slowly edging our way until this month when it has surged higher – its scary to even mention it for fear of giving the position the kiss of death! A pop above $21.50 will enable us to raise our stops, always a nice feeling.

MM is bullish ORI targeting the $25 area.

Orica (ORI) Chart

Investment of the week.

Marketing and  Supermarket operator Metcash has recovered extremely well  from its nadir in 2015 but technically it looks good while similar stocks, albeit larger, have rallied over recent weeks.

MM is bullish MTS targeting $4.

Metcash (MTS) Chart

Trade of the week.

A sell then buy scenario for a change, we are bearish PDL targeting $7 or even lower from where we will be looking for buy triggers e.g. a “DOJI” week – a candle set up.

MM is bearish PDL targeting ~$7 from where it will start to look for support / value. 

Pendal Group (PDL) 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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