Market Matters Report / Market Matters Weekend Report Sunday 3rd November 2019

By Market Matters 03 November 19

Market Matters Weekend Report Sunday 3rd November 2019

Market Matters Weekend Report Sunday 3rd November 2019

The ASX200 slipped lower last week as the influential banking sector weighed on the index following a poor report from ANZ which fell -6.6% over the 5-days. With the banking sector making up almost 25% of the ASX it’s a tough ask for the local market to make any bullish headway when the “Big 4” are struggling but things can change quickly and if Westpac (WBC) & / or National Australia Bank (NAB) report solidly next week the disappointing report from ANZ is likely to be branded a company specific issue, as opposed to more sector wide. Overall the ASX200 continues to experience noticeable choppy sector rotation while the index itself remains in the same Neutral Pattern since late July.

Following on from the tough week for the banks we thought today’s report would be an ideal opportunity to briefly review the major 11-sectors within the ASX200 for further clues around where we should / shouldn’t be invested moving into 2020. Then if we find anything we particularly like, or dislike, from a technical perspective it’s time to dig deeper into the underlying stocks within the respective sector.

Today’s report is a great example of how / why MM writes a Weekend Report – I sit back when the markets are closed and no distraction are interrupting thought processes whether by stock movements, news feeds or phones! Basically I scour the market looking for ideas and then explore in detail anything that catches the eye, specifically looking for attractive risk / reward opportunities.

Our underlying view towards the ASX200 remains intact:

MM is technically neutral to bullish while our “Gut Feel” is we will see fresh all-time highs before Christmas.

ASX200 Index Chart

Friday night again saw the US S&P500 make fresh all-time highs following a solid employment report, that’s up over +22% for this calendar year – as we’ve said before stocks continue to climb the wall of worry fuelled by record low interest rates / bond yields. Bull markets usually end on excessive optimism / euphoria and I certainly don’t feel that from any corners, at this stage the bull market is alive and kicking until further notice. In the classic market cycle, we’re still probably “growing” it would appear.

It may be the longest equities bull market in history but that’s not enough of a reason to run to cash and in our opinion it’s likely that at least one of the below 3 economic events must unfold to produce another 20% correction  i.e. at this stage back to where we started  the year.

1 – The global economy rolls into a recession, but central banks are fighting this outcome with everything at their disposal. If the US & China can put their differences apart this may still be a few years away – Australia has enjoyed over 28-years without the “R word”.

2 – Interest rates start to rise removing the major tailwind for stocks but our view is they may be bottoming however it remains hard to see them rallying anytime soon.

3 – Corporates stop delivering at reporting season but so far US companies continue to beat expectations albeit with the odd miss, unfortunately we’ve had more than our fair share of these in Australia.

Remember only a few weeks ago the Bank of America Fund Managers Survey showed the largest flight to safe assets from equities since the GFC, not a typical back drop that can be labelled euphoria.

US S&P500 Chart

Following the Feds 0.25% cut to interest rates last week we continue to anticipate interest rates / bond yields remain around current levels for the next few years which theoretically is very bullish for equities, remember what legend Warren Buffett said in May:

“Stocks are ridiculously cheap with US 30-year bond yields sitting around 3%” – Warren Buffett

The below chart illustrates perfectly that the very closely watched US 10-year Notes have been bouncing around 2% for almost a decade with obvious periods of hawkish & dovish bias along the way i.e. our call of at least a few more years is hardly a radical view.

US 10-year Bond Yield Chart

Last week we saw the gap narrow slightly between the Australian and US 10-year bond yields, hardly discernible from the chart below. However, this small move appeared to be enough to propel the $A back above 69c, its highest level since July.

MM remains bullish eventually targeting the 80c region for the $A – a very contrarian view.

Australian & US  10-year Bond Yields Chart

Australian Dollar ($A) Chart

The 11 Australian Stock Market Sectors.

Today we’ve followed a pretty simple format to look at the sectors and if / when anything of specific interest pops out then we have delved a touch deeper.

NB, We haven’t looked at the Telco Sector because its only 3.1% of the ASX200 and its importantly almost totally dominated by Telstra (TLS)

1 – Consumer Discretionary Sector is 7.2% of the ASX200 and includes Webjet (WEB), Wesfarmers (WES), Domino’s (DMP), Flight Centre and Crown Resorts (CWN) – it’s up +15% for the year.

At this stage we have a neutral to bullish view, but the risk reward feels poor and our “Gut Feel” is a decent pullback is close at hand hence we have no exposure in the Platinum, or Income Portfolio’s.

2 – Consumer Staples Sector is 5.6% of the ASX200 and includes Woolworths (WOW), Bega Cheese (BGA), Ingham’s (ING), Costa Group (CGC) and a2 Milk (A2M) – it’s up +16.9% for the year.

There’s clearly been a few hand grenades in this sector recently but heavyweights Coles (COL) and Woolworths (WOW) have remained the backbone of performance. We’re neutral / bullish the sector but Coles (COL) looks good for another +5% at least and we are giving CGC the benefit of the doubt just here.

ASX200 Consumer Discretionary & Staples Sectors Chart

3 – The Energy Sector is 5.6% of the ASX200 and includes Woodside (WPL), Origin (ORG) and Whitehaven Coal (WHC) – it’s down -0.2% for the year.

We feel the performance differential between the Energy and Materials Sectors is poised to close but will Energy rise, or Materials fall? It’s not 100% clear but the Energy Sector is threatening to break sharply to the upside – time to watch, especially as we are long and bullish the Materials Index. 

4 – The Materials Sector is 17% of the ASX200 and includes Fortescue (FMG), BHP Group (BHP), RIO Tinto (RIO) and Newcrest Mining (NCM) – it’s up +14% for the year.

We are bullish and fairly heavily committed to this view, a great sign for the Energy Sector assuming of course we are correct.

ASX200 Energy & Materials Sectors Chart

5 – The Financials Index is 29.6% of the ASX200 and includes household names like Commonwealth Bank (CBA), AMP Ltd (AMP), Macquarie Group (MQG) and Suncorp (SUN) – it’s up +8.2% for the year.

We remain bullish the Financial Sector and are accordingly long across both of our local portfolios – we are looking for at least 15-20% upside.

6 – The Healthcare Sector is 10% of the ASX200 and includes CSL Ltd (CSL), Ramsay Healthcare (RHC), ResMed (RMD) and Cochlear (COH) – it’s up +32.8% for the year.

Arguably our biggest mistake this year was to get off this train too early but that is no reason to be suckered in by FOMO (Fear of Missing Out). We like some of the quality companies in this index but can’t justify today’s prices – the P/E expansion has gone berserk in some of these names as cashed up fund managers struggle to find places they feel comfortable to invest. Also, an appreciating $A will become a sector headwind, we are comfortably square for now.

ASX200 Healthcare & Financials Indices Chart

7 – The IT Sector is 3.8% of the ASX200 and includes Wisetech (WTC), Xero (WRO), Afterpay (APT) and Appen (APX) – it’ now ‘only’ up +18% for the year after some savage corrections in a few core names.

At this stage we still have no interest in the high valuation Australian IT Sector.

8 – The Industrials Sector is 8.6% of the ASX200 and includes Transurban (TCL), Seek (SEK), QANTAS (QAN), CIMIC (CIM), Service Stream (SSM) and NRW Holdings (NWH) – it’s up +21.4% for the year.

MM is bullish the Industrials Sector with an initial target of fresh all-time highs ~3% higher – we are long SSM and NWH in line with this opinion.

ASX200 IT & Industrials Indices Chart

 9 – The Utilities Sectoris 1.9% of the ASX200 and includes AGL Ltd (AGL), AusNet (AST) and APA Group (APA) – it’s up +10.9% for the year.

Not our favourite sector, we are neutral at present.

10 – The Real Estate Sector is 7.8% of the ASX200 and includes Lend Lease (LLC), GPT Group (GPT), Goodman Group (GMG) and Charter Hall (CHC) – it’s up +25.5% for the year.

We see a little more upside in this sector and with interest rates looking very close to a bottom a major tailwind is being removed.

ASX200 Utilities & Real Estate Indices Chart

Conclusion

Nothing particularly very new at the end of the exercise but you never know at the beginning! What did catch our eye:

1 - Energy looks set to outperform Materials, if / when we increase our exposure to the cyclicals we will likely target an energy stock.

2 – We like the Financials and Industrial Sectors but not the IT Sectors.

1 –  The MM Platinum Portfolio

Last week we sold our ANZ position switching the funds equally between National Australia Bank (NAB) and Westpac (WBC).

Our cash level now sits at 9.8% - https://www.marketmatters.com.au/new-portfolio-csv/ if we assume we are taking up the Costa (CGC) rights, which we will. 

The 2 positions we are watching particularly carefully with a view to switching, or simply cashing in, are our exposure to gold via Newcrest (NCM) and Evolution (EVN).

Our concern comes from the diminishing trade tensions and slowly but surely firming $A – these are both headwinds for the Aussie gold miners, conversely a weak $US is very supportive of the gold price hence it’s a case of the positions are on watch, not sell asap.

Newcrest Mining (NCM) Chart

Moving onto a stock we like for this portfolio bearing in mind we only have a relatively low sub 10% sitting in cash.

Our top pick technically feels like swimming back into the shark infested waters but technically Sims Metals (SGM) looks great and fundamentally we feel the scrap metal company might just have cleared the decks with last week’s disappointing trading update but they remain at the mercy of the ferrous scrap price. Hence while we like it MM, we are unlikely to buy it, especially as at this stage we like the mix of the MM Platinum Portfolio.

Sims Metals (SGM) Chart

2 MM Income Portfolio

Last week MM switched our ANZ Bank (ANZ) position Westpac (WBC) for our Income Portfolio, as we did with the Platinum, fingers crossed with tomorrows WBC result. Our cash position remains at only 0.5% : https://www.marketmatters.com.au/new-income-portfolio-csv/

No real macro change, MM believes that bond yields may have found a decent low but the Official RBA interest rate is unlikely to increase anytime soon hence it remains easy to say “why hold cash in today’s market when yield / income is your objective” .

MM is considering less of the classic “yield play / defensive” options moving forward, these crowded plays are feeling vulnerable to MM.

3 major Australian interest rates / Bond yields Chart

3 –  International Equites Portfolio

Last week we sat back as planned to evaluate the US reporting season.  Our cash position remains at 48% : https://www.marketmatters.com.au/new-international-portfolio/

At this stage we feel that there are 2 main ingredients missing from our International Portfolio, firstly is some extra resources exposure, BHP is good but we like the VanEck MVR ETF for a greater tick this box:  https://www.vaneck.com.au/funds/mvr/snapshot/?audience=retail plus secondly and probably a most likely first purchase exposure to the Emerging Markets via an ETF: https://www.blackrock.com/au/individual/products/273417/ishares-msci-emerging-markets-etf?locale=en_AU&switchLocale=y&siteEntryPassthrough=true

*Watch for alerts.

iShares Emerging Markets ETF (IEM) Chart

4 - MM Global Macro ETF Portfolio

Also no change to this portfolio, our cash position remains at 51.5% : https://www.marketmatters.com.au/new-global-portfolio/

Our favourite view moving forward is to buy the British Pound , we feel Boris Johnson will win the election and BREXIT will finally get sorted, surely common sense will finally prevail.

The ETF will like to “play” this view is the Invesco British Pound Sterling Trust (FXB US): https://etfdb.com/etf/FXB/

*Watch for alerts.

British Pound (GBP) v $US Chart

Conclusion

No change, we feel it’s time to move away from the stocks / sectors who have benefited from falling interest rates and a weak $A although the underlying indices and long-term trends remain firm.

*Watch for alerts.

Chart of the week.

Trying to fathom what comes next for the stock market is like trying to complete a jigsaw without all the pieces i.e. A degree of guesswork. If we look at the US small cap Russell 2000 it looks good targeting over 10% upside whereas the S&P500 is banging its head against long term resistance that will have many continually trying to sell.

Our interpretations is the Russell 2000 will come back into favour with a bang and rally towards 1800 while the S&P500 keeps grinding higher, as we said earlier climbing the wall of worry – it’s an interesting conundrum but there are no sell no sell signals for either index.

MM is bullish the small cap Russell 2000 index.

US Russell 2000 Index Chart

US S&P500 Index Chart

Investment of the week.

The banks are out of favour following ANZ’s poor result last week but where there’s worry often comes opportunity. If we see further selling of the sector next week and assuming WBC and NAB’s results are palatable we will consider increasing our holding in CBA below $76.

MM likes CBA below $76.

Commonwealth Bank (CBA) Chart

Trade of the week.

Biotech business PNV has thoroughly enjoyed 2019, the company now has a market cap of over $1.5bn. Technically this stock looks great for new highs, with the trend, but I stress its huge valuation would have us on high alert into any sudden weakness.

MM likes PNV for at least 15% upside.

PolyNovo Ltd (PNV) 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.

Enjoy your Sunday!

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

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