Market Matters Report / Market Matters Weekend Report Sunday 30th June 2019

By Market Matters 30 June 19

Market Matters Weekend Report Sunday 30th June 2019

Market Matters Weekend Report Sunday 30th June 2019

A solid financial year is behind us with the ASX200 rallying +6.8% before dividends, after enjoying an impressive 23.6% rally from Decembers panic low. The post GFC, cheap money, bull market has continued to provide for the faithful while many investors have missed out having sat on elevated cash levels. However it hasn’t been an uninterrupted rally by the local market with 3 meaningful pullbacks over the last decade of -25%, -21.5% plus last year’s relatively minor -15.1% correction in Australia. At MM we are firm believers in the long-term performance of the stock market, not a big call considering the market has returned an average ~13% pa since 1900 with over 80% of the years producing a positive return – in other  words being “long cash” has repeatedly been the poor investment stance.

However at MM we continually look to add value across our respective portfolios through timely stock & sector selection plus of course tweaking cash levels when appropriate e.g. we were heavily cashed up around both of the recent major swing highs enabling us to accumulate stocks into the ensuing weakness. The phrase “keep it simple stupid (KISS)” can be a very useful adage for investing, especially when combined with solid analytics and patience. We continue to believe the market is slowly becoming less attractive from a risk / reward perspective hence we are tweaking our portfolios to a more conservative stance, including higher cash levels, to enable us to be flexible and opportunistic if / when the next decent pullback unfolds.

A phrase we often dust off which can be used to illustrate our thoughts was provided over 100-years ago, when asked how he’s become such a successful investor, Baron Rothschild’s reply was simple:

“I will tell you my secret if you wish.  It is this:  I never buy at the bottom and I always sell too soon.” – Baron Rothschild.

As we slowly become more  conservative into the current market strength remember we went aggressively long around Christmas time, a touch premature considering the final few  % dive towards the 5400 area but strategically the correct play, hence again we won’t panic if we continue de-risking ~6700 and the market squeezes a few % higher, unless of course fundamentally something changes our outlook!

At MM we remain in “sell mode” but becoming more selective in our Platinum Portfolio which is now holding ~17% cash, while the Income Portfolio’s remains in ~4.83% cash. However, our freshly launched  International Portfolio is still holding 85% in cash which is likely to be slowly and conservatively deployed over the next few weeks.

NB Our MM Global ETF Portfolio will be launched on Wednesday as MM enters another chapter in its evolution.

Short-term MM still remains technically bullish the ASX200 while it can remain above 6580 with the next technical target above 6800.

The markets open on Monday is likely to be determined by investors  interpretation on the US – China trade outlook following the G20 meeting in Osaka, Japan. Yesterday lunch time President Trump announced “We’re right back on track with China” and they will be putting out a statements soon, if this evolves as it initially sounds a strong opening for stocks looks likely on Monday.

ASX200 Chart

Last week we saw the Australian 3-year bond yield bounce marginally back towards the psychological 1% level but the impact on the yield sensitive stocks was extremely pronounced. The real estate, retail, transportation and Utilities sectors all had a tough week at the office dragging the  ASX200 down even while heavyweights BHP & CBA closed in positive territory.

Our opinion remains the market is fully pricing in 2 interest rate cuts in 2019, taking the RBA cash rate down from 1.25% to 0.75%, hence we feel the risks for stocks are that cuts don’t come as fast, or as deep, as many expect e.g. last week alone the Real Estate sector fell almost 5% as bond yields bounced marginally.

MM has no interest chasing “yield  play” stocks until further notice.

However interestingly Warren Buffett said just a few weeks ago that stocks were ridiculously cheap if you believed interest rates / bond yields will remain at current levels but in almost the same breath he expressed his lack of confidence that these low rates will remain a reality i.e. he cannot imagine low rates, high employment and low inflation is a mix that will remain sustainable i.e. something is likely to give.

Australian 3-year bond yields Chart

The “Oracle of Omaha” was specifically discussing the US 30-year bond yields at the time which are currently trading at 2.5%. To put things in perspective if you can borrow money at 2.5% for 30-years and invest in the Australian share market which has averaged 13% pa over a similar time frame why wouldn’t you borrow and buy stocks - it’s almost too easy, it feels like a no brainer arbitrage.

If / when we see a meaningful pullback in stocks they are a MAJOR buy unless a deep recession is unfolding or rates are accelerating higher.

US 10 & 30-year bond yields Chart

We have given some more thought to our contrarian bullish view on the “Little Aussie Battler” which has managed to close out June back above the psychological 70c area. The $A is either trading extremely cheap or the iron price is close to a major correction, our preferred scenario is a bit of both. Hence we remain very wary of stocks which have been pushed higher by the tailwind of a strong $US.

We remain bullish the $A believing the next 10% move will be on the upside rather than the downside.

Australian Dollar ($A) Chart

Australian Dollar ($A) v Iron Ore ($US/MT) Chart

1 –  Platinum Portfolio

The MM Platinum Portfolio enjoyed another good week courtesy of solid performances from Pact Holdings (PGH) which rallied almost 20% and Ausdrill (ASL) +16%. The moves illustrated perfectly when the value elastic band becomes too stretched in either direction they’re liable to snap back extremely hard on news that doesn’t warrant the extreme pessimism /optimism. Last week we added to our Pact Holdings (PGH) position while taking a 57% profit in Bingo (BIN) and 12% in Aristocrat (ALL)  taking our cash position up to a healthy 17%: https://www.marketmatters.com.au/new-portfolio-csv/.

While we still think the market can trade higher after this weekend’s G20 stocks are becoming rich and we feel the prudent risk / reward strategy is to slowly start moving to a higher cash / more defensive skew over our portfolios.

Following the recent moves we have a number of stocks close, or at, our objectives, while 2 have blown their respective levels away:

Trading around / close to our initial target area – BHP Group (BHP), Iluka (ILU), Macquarie Group (MQG) and Ausdrill (ASL).

Powering through our initial target area –NIB Holdings (NHF).

As we said previously this has proven to be a good time to give positions a little room as fund managers have been keen to make their portfolios look good for the EOFY rule off but that is now behind us and it’s time to start all over again. The important message remains we are considering  increasing cash and becoming slightly more defensive but don’t assume we will be grabbing our large profits just to feel good, we will consider each position on their individual merit at the time.

*watch for alerts over next 2-weeks.

Macquarie Group (MQG) Chart

After recent strong rallies by Emeco (EHL), Ausdrill (ASL) and Pact Group (PGH) we only have 3 main “losers” of concern. At this stage we are still not panicking on these underperformers (ORE, CGC and JHG) although I am no longer considering averaging as it’s becoming easy to start feeling they’ve had their opportunity to rally, especially Orocobre (ORE) and Janus Henderson (JHG).

Yet again the broad market threw up very few fresh buy ideas this week as it remains above our initial 6600 target area, remember we are generally looking to sell into current strength, not buy. However there are 3 stocks / sectors that we still have our eyes on:

1 Telstra (TLS) $3.87 – we have fallen on our sword and decided we did take profit on TLS too early. Telstra looks good technically however the rise in the stock price means a lot of optimism is now built into its full year results come August, and for that reason – we would not buy it now. A decline post results would have us interested again below the ~$3.70 region

2 Santos (STO) $7.08  – The oil sector looks capable of a decent bounce over the coming weeks with STO looking well positioned for a short-term move towards $8.

3 Golds – we bought Newcrest (NCM) last week only to watch it underperform compared  to other precious metal stocks but we still want to increase our sector exposure into any pullback.

Janus  Henderson (JHG) Chart

2 Income Portfolio

The Income Portfolio https://www.marketmatters.com.au/new-income-portfolio-csv/ had yet another quiet week with MM not transacting hence it still holds 4.83% in cash.

Basically no change, until we see any indications that bond yields have bottomed MM sees no major reason to significantly reduce our large market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / income is your objective.

The RBA Cash Rate Chart

 3 –  International Equites Portfolio

The MM International Equities Portfolio was launched last week and has started slowly as intended buying Apple (AAPL), Barrack Gold (ABX) and Ping An (2318 HK) : https://www.marketmatters.com.au/new-international-portfolio/.

No change, we are still sticking with this for now - “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 steady careful process.”

Our favourite overseas stock today is Samsung which we have covered a number of times over the last 6-months – expect a “buy alert in Samsung next week”.

MM is bullish Samsung with an initial target over 15% higher and a stop ~7% lower – solid risk reward.

Samsung Electronics (005930 KS) Chart

The US S&P500 is only 2-3% below our medium-term target for the main barometer of US stocks, hence making us extremely reticent to invest too many funds at current levels i.e. remember we are in “sell mode” overall.

On a regional basis we will be looking for value in the Emerging Markets (EEM) before Europe due to our concern for the future of the EU and bearish view on the $US which should benefit the EEM.

US S&P500 Chart

4 - MM Global ETF Portfolio

MM will be launching this portfolio next week.

Below is a quick snapshot of ETF’s available on the ASX: To be clear, this is a model portfolio that will hold a mix of global ETFs.

We still believe there are a couple of great “plays” worth considering and preparing for but remember by definition major macro views don’t change too often:

1 – A potential spike towards 65c by the $A discussed throughout 2019 will represent great risk / reward buying in our opinion but either way we are bullish the $A over the coming 12-months.

2 –  As you all know by now we love gold over the next 12-months, this can be played via ETF’s or stocks, both locally and o/s depending on opinions around currencies and an individual companies quality / value.

3 – We are considering ways to buy the Emerging markets v Europe.

4 – Moving forward we are watching for potential turns in stocks and bonds BUT are in no hurry to fight the current bullish trends in both – see last week’s chart of the week.

A few more days above 2950 followed by a break below 2925 will trigger a “sell signal” for US stocks, potentially important for all 4 portfolios.

S&P500 Index Chart

Conclusion

Short-term Australian stocks look ok but we intend to be “trickle” sellers over the coming weeks, ideally into further strength.

US stocks will trigger a sell signal with a break below the 2925 by the S&P500, similarly we may consider a “cheeky” short around the 3030 area.

Gold still looks great and we want exposure to the sector in our portfolio (s) moving forward.

Chart of the week.

The fundamental story around Europe is not pretty reading BUT it feels very baked into stock prices with nobody talking the region higher, perhaps the crowd is wrong in the short-term, it wouldn’t be the first time!

Technically European stocks look they can defy the  markets bearish sentiment and make fresh post GFC highs, over  10% higher.

Euro Stoxx (SX5E) Chart

Investment of the week.

The best investment decision can be a sell as well as a buy. APT was smacked 13% from its fresh all-time high last week on the news that global giant Visa was planning to enter its “buy now, pay later” market. MM flagged this potential scenario a few times in 2019 and in our opinion it couldn’t have been a worse player to kick off the competition, we expect more will eventually follow suit.  In our opinion the selling could easily intensify from here.

There’s a saying in business that to make money you need to first, the best or crooked, we question if APT will be the best when Visa line up against them.

MM is bearish APT initially target ~20% downside.

Afterpay Touch (APT) Chart

Trade of the week.

Another sell for the aggressive / sophisticated member, we believe geospatial mapping business has gotten ahead of itself now being valued at $1.69bn. We are  expecting a test of the $3 area in 2019, perhaps a sign that the high valuation / growth stocks may see some profit taking, just as they did in late 2018.

MM is bearish NEA targeting 15-20% downside.

Nearmap Ltd (NEA) 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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