Market Matters Report / Market Matters Weekend Report - Sunday 2nd August 2020

By Market Matters 02 August 20

Market Matters Weekend Report - Sunday 2nd August 2020

Market Matters Weekend Report - Sunday 2nd August 2020

The ASX200 continues to be glued to the psychological 6000 area although Fridays -2% drive lower implies an intent to test the downside in early August, not surprising considering the recent escalation in the number of cases of COVID-19:

1 – Victoria reported another 627-cases for Friday as things continue to spiral, a quick glance at Australia’s new cases below illustrates the trouble facing the nation, we’re already in a significantly worse position than March / April with one  state really contributing to the 2nd wave. Dan Andrew and co. might manage to flatten the curve this week but if NSW, QLD et al take over the economic damage will be bigger.

2 – Globally we saw a record 292,527 cases reported on Friday, its not just us with our back against the wall. Worldwide there are now a staggering 17.5 million cases and almost 675,000 deaths with no obvious end in sight. Ignoring the virus and hoping it will go away akin to President Trumps game plan has failed but so would it appear has going into aggressive lockdown followed by a steady re-opening as both ourselves, Europe and much of Asia are currently demonstrating.

I hate to be a pessimist but it’s really hard not to imagine the news becoming far worse before it improves. We believe stocks remain bullish medium-term fuelled by the “free money” from the RBA and massive stimulus from Scott Morrison and Co. but unfortunately it’s hard to comprehend any meaningful further market appreciation without an improving fundamental backdrop -  reporting season will see a number of stocks buck the trend in both directions but MM is looking for ongoing choppy market consolidation.

MM is now neutral /mildly bearish local equities short-term.

Confirmed Australian cases of COVID-19 Chart

The local ASX200 has now basically remained unchanged for 8-weeks, we’ve been advocating “sell strength and buy weakness” since the start of June and after witnessing it unfold so perfectly I now believe the index is consolidating its 1796-point rally from the depths of panic in March – a common technical target for such a correction would be the 5500 area but my “Gut Feel” tells me this time might disappoint the many bears, the 5700-5800 area feels good buying on the index level to us i.e. we feel any pullback will be shallower and unfold quicker than many expect.

As we’ve discussed over the last week markets eventually return to their points of equilibrium and on reflection the recent consolidation is simply offsetting the massive volatility experienced around March. Our preferred scenario is the local index will push higher into Christmas after the current pullback is complete, hence MM moved slightly down the risk curve as we look to accumulate stocks into any weakness - the ASX200’s inability to follow Europe and the US to fresh 5-month highs in late July was a warning sign that appears to have worked.

MM remains bullish Australian stocks medium-term.

ASX200 Index Chart

There appears no answer to COVID-19 until a vaccine is proven to be safe, effective and easily mass produced, unfortunately this is likely to be a year away at best. Hence the current market theme is likely to remain largely the same until a degree of market certainty is delivered and a likely date can be confidently forecast for a vaccine:

1 – Many of the market trends are becoming long in the tooth but until we get a reliable source confirming a vaccine will become readily available on “x-date” attempts by markets to follow through with a new thematic will be prone to failure e.g. bond yields attempting to rally.

2 – Stocks who are suffering badly because of the re-escalating number of global lockdowns are likely to remain under pressure e.g. Sydney Airports (SYD) and QANTAS (QAN).

3 – Value stocks keep trying to take the outperformance banner from the growth sector, but this is a huge ask until economic optimism returns leading to bond yields enjoying a sustainable recovery – its close but not time yet in our opinion.

When we see market outperformer Apple (AAPL US), which was already up over 30% for the year by Thursday, rally an additional 10% on Friday following its report there’s no surprise the IT stocks continue to look great in 2020 – the trend remains in tact and its likely to do so until we see a pick-up in bond yields which will make many stocks / sectors become at least worth considering. When unloved stocks come back into the “investable frame” recoveries can be both huge and explosive e.g. Sydney Airports (SYD) soared over 60% from its March low until it became apparent that uninterrupted international travel was years away, now another test of $4 would not surprise.

If we are about to get a decent pullback in August, the decline might remain focused in the underperformers, but we do believe they will again have their day in the sun this side of Christmas.

Sydney Airports (SYD) Chart

However we do believe the $US has already commenced a significant change in trend to the downside, one that’s helped the likes of gold and silver rally strongly. While equities and bonds have been fairly quiet through July it’s been a very different story in FX land  – as we keep saying at MM, we believe the tailwind of $US revenue for Australian companies over the last decade is rapidly becoming a headwind – our initial target for the  $A is the 80c area, or ~12% higher while the $US Index looks poised to test its 2018 low. However, after recovering from its 2-year low last week a few weeks consolidation feels likely before the down trend commences, potentially this will pause the explosive rally in precious metals.

MM remains both bullish the $A and bearish the $US.

The $US Index Chart

In last Weekend’s Report we said MM was poised to again turn bullish the US tech based NASDAQ and by the close on Monday the picture was already rosy, the market subsequently closed up 4% for the week on Friday - “excellent technical buy signals with the bull trend will be generated only 1% higher”. The risk / reward as we alluded to last Sunday favours holding longs with an initial target 4-5% higher. Hence for investors like ourselves we may consider taking some profit on tech-based holdings into fresh highs but not yet. MM is monitoring our tech holdings carefully into current strength:

1 Growth Portfolio: Zip Co (Z1P), Bravura (BVS) and Xero (XRO).

2 International Portfolio: Trade Desk Inc (TTD), Alphabet (GOOGL US), Microsoft (MSFT US), Tencent (700 HK), Alibaba (BABA US), Samsung (005930 KS) and Apple (AAPL US).

It’s important to remember that even the very best quality stocks have a fair value and the elastic band will only stretch so far  before investors take profit leaving the complacent trying to justify unrealistic valuations e.g. CSL Ltd (CSL) is trading -18% below its April high and outperformer Microsoft (MSFT US)  was basically unchanged in July while the FANG’s soared although it now looks good short-term.

MM remains bullish US tech stocks with an initial target ~5% higher.

US NASDAQ Index Chart

Interestingly our largest BNPL (Buy now pay later) stock Afterpay (APT) continues to dance in sync with the US NASDAQ with our technical target around ~$80 still looking a strong possibility in the coming weeks i.e. over 15% higher. However, I would be very conscious of a potential false breakout around these levels, the straight line rally since March feels overdue a decent period of consolidation with a significant degree of growth already built into todays $19bn company valuation. 

MM remains bullish Afterpay (APT) targeting ~$80.

Afterpay (APT) Chart

European stocks have followed our anticipated road map for most of the last few months, there’s no real change to how we see things evolving through August - we are looking for an ongoing pullback towards 3000 over the coming weeks with a bounce likely short-term after the quick 8% dip, the ASX has outperformed of late but unfortunately we didn’t have the strength to make fresh post-March highs last month i.e. we bounced less hence we will probably correct less.

MM remains short-term cautious European stocks.

EURO STOXX 50 Index Chart

Updating our thoughts for MM’s 4 Portfolio’s.

As subscribers know MM is bullish global equities over the next 12-18 months however even with huge government & central bank economic stimulus, we feel it’s a huge ask for equities to continue their ascent towards fresh all-time highs without some light at the end of the coronavirus tunnel. Stocks are enjoying a “V-shaped” recovery yet the global economy and COVID-19 recovery is most definitely not, this disconnect feels a little stretched, we are not saying it’s a huge sell but we do caution against aggressive buying right here, right now i.e. we feel it’s time for some cash on the sidelines in case better opportunities present themselves.

MM remains bullish global equities medium-term.

MSCI Global World Index (MXWO) Chart

1 MM Growth Portfolio

Last week In line with our current market stance MM increased our cash position marginally up to 8% by trimming our holdings in OZ Minerals (OZL) and Macquarie Bank (MQG) : https://www.marketmatters.com.au/new-portfolio-csv/

No great surprises in our current thinking but reporting season always throws up some wild cards hence be prepared for a sudden change in direction.

Potential Buys – Newcrest Mining (NCM).

Potential Sells – Bravura (BVS) &/or Zip (Z1P) if they follow the rampant NASDAQ higher.

We saw a great example of the impact of news this time of year when AMP tumbled almost 13% on Friday after disappointing the market with their pre-released first half numbers. The group is expected to announce 10% falls in earnings for Australian Wealth Management and AMP Capital segments plus AMP Bank to see earnings fall nearly 30%. First half earnings are now only expected to be $140-150m, well below market expectations.

MM still sees no reason to buy AMP, another test ~$1 would not surprise.

AMP Ltd (AMP) Chart

2 MM Income Portfolio

 No change to our MM Income Portfolio last week with our cash holding remain at 5% : https://www.marketmatters.com.au/new-income-portfolio-csv/

There was some action in our portfolio last week with Perpetual enduring a tough time following a capital raise for an acquisition in the US – we like the move for the record. Also, an 8% drop in IVE Group (IGL) didn’t help the net performance to round out July, this is a business that needs an open economy to flourish. On the flipside, Super Retail (SUL) upgraded earnings and rallied sharply on Friday.  

Potential Buys – We intend to participate in the Perpetual (PPT) capital raise.

Potential Sells –Sydney Airports (SYD) looks vulnerable as the virus situation deteriorates, if we cut this it would be a short term move only.

While we continue to believe bond, yields are in a major bottoming process it could last well into 2021, interest rates look destined to be “lower for longer”.

MM still sees no reason to increase cash holdings for any length of time in today’s zero interest rate environment.

Australian 10-year Bond yield Chart

3 MM International Portfolio

At the end of July we trimmed our profitable position in Microsoft (MSFT US) and bought Anglo American Plc and Antofagasta leaving our cash holding at 6% : https://www.marketmatters.com.au/new-international-portfolio/

Our portfolio is now roughly split as follows - 40% IT, 30% resources and 30% financials, not a bad mix in our opinion at current levels although I wish there had been less financials since March and of course more IT holdings, it would enable a more comfortable aggressive “tweak” between the two. Moves we are considering this week remain the same as in Wednesdays International Report:

Potential Buys – Barrick Gold (GOLD US).

Potential Sells – Alphabet (GOOGL US) and Janus Henderson (JHG US) – both stocks closed down on Friday night in a strong session reaffirming our view they belong in this row.

There’s a saying in trading that “surprises usually happen with the trend”, and this was extremely evident with Apple on Friday soaring over 10% again posting fresh all-time highs. MM is enjoying being long Apple and sees no reason technical or fundamental to consider cutting the position.

Apple Inc (AAPL US) Chart

4 MM Global Macro ETF Portfolio

No change with our MM Global Macro Portfolio leaving our cash position at 24% but opportunities are presenting themselves in a number of areas : https://www.marketmatters.com.au/new-global-portfolio/

Moves we are considering this week are largely the same as in Wednesdays International Report:

Potential Buys – ETF Securities Silver Bullion ETF (ETPMAG) and the unleveraged iShares MSCI China ETF (MCHI US).

Potential Sells – ProShares Short VIX ETF (SVXY US).

We’ve mentioned the China Shenzhen CSI 300 Index previously, our bullish view has been reinforced by its ability to hold the 4500 area.

China’s Shenzhen CSI 300 Index Chart

Conclusion

We remain bullish equities medium-term but short-term things feel tired.

We are likely to follow a number of the actions covered 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

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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