Morning Report / Overseas Wednesday – International Equities & Global Macro Portfolio (LLC, AWC, IGO, SQQQ US, GOOGL US, QQQ US, FUEL)

The ASX200 enjoyed an excellent rally yesterday as the Resources & Banking Sectors continued to drag a begrudging index higher although this time there were also some decent gains in the Real Estate & Industrial stocks which combined to take the index up almost 1%, less impressively only 60% of the stocks managed to close in positive territory. The short-term “value-growth” elastic band continues to stretch and the likelihood is when the surge higher by bond yields takes a breather growth stocks like IT and Healthcare will find some buying, how sustainable it can be is of course the million dollar question.

In yesterdays Afternoon Report I explained why rising bond yields creates a headwind for growth stocks through relative duration, in 2021 alone the Australian 10-year bond yield has soared from 0.91% to 1.37%, effectively a 50% kick up in yields in less than 2-months. Global markets are clearly indicating they expect improved economic growth and potentially a lift in inflation, a move which is expected by many to take the air out of the sails of big Tech in particular, again I hear some say but why will that hurt Amazon shares?

1 – When bond yields rise the cost to borrow money increases which puts pressure on some growth companies with high debt levels plus as we said yesterday it decreases the relative allure of future cash earnings i.e. in valuation models share prices are compared to the simple risk free returns available in bonds hence as bond yields rally stocks become less attractive especially those with high valuations based on future earnings e.g. Afterpay (APT).

2 – The S&P500 is already trading on a forward P/E ratio ~22x compared to its long- term average of 15.3x, this makes sense when bond yields were close to zero but not if the keep surging higher and generally when we see a market rerate its average P/E lower it’s the growth end of town that suffers the worst e.g. the chart below illustrates how back in Q4 of 2018 we saw the much loved IT & Healthcare stocks smacked on bond yield concerns e.g. CSL and Cochlear both plunged over 25% posting losses almost double the ASX200 – history does repeat!

We are huge believers in the quality growth stocks both locally and overseas but after being massive outperformers over the last decade as we saw in 2018 the degree of any sharp corrections should not be underestimated, in the same period of 2018 Amazon (AMZN US) shares actually fell 36%. So far US tech has largely ignored bond yields but we do believe they will have a meaningful pullback in 2021, perhaps on the next leg higher in yields – so far this weeks relative weakness is a “wobble” but not irrelevant.

ASX Healthcare & IT Sectors Chart

In yesterday’s AFR legendary investor Ray Dalio discussed his 6 measurements for a bubble in equities, his conclusion was similar to ours i.e. there is no overall problem “just yet” but there are pockets of the market where valuations need to be questioned e.g. Bitcoin. Overall this ties in with our current interpretation that the bull market post the GFC is maturing but its not likely to be this year when we should scramble for the exits although I do anticipate moving down the “risk curve” at some stage.

Overnight US stocks recovered heavy early losses to close basically unchanged, the SPI futures are calling the local market to fall ~0.4% early on today with BHP down over 1% in the US.

Reporting today we have: (stocks we hold in yellow): APA, APX, ASG, BGA, CCX, DRR, FCL, HLS, HT1, HUM, SIQ,  IEL, IFL, IVC, JHC. Plus see a full list on the Market Matters reporting calendar here. * Some of these dates / companies can change*

MM remains bullish the ASX200 through 2021.

ASX200 Index Chart

One recent characteristic that’s caught my attention through the current reporting season is the “delayed response” to company’s profit reports / updates. On Monday Lend Lease (LLC) slipped a few cents lower after reporting core operating EBITDA of $405m however on Tuesday after digesting the result overnight LLC soared more than +8% to its highest close in over a month, obviously analysts decided to embrace the companies shift towards core urbanisation and investment platforms. After recently correcting 23% I can see LLC building on yesterday’s gains – fingers crossed that’s not tempting fate!

MM remains bullish and long LLC.

Lendlease Group (LLC) Chart

Following on from LLC yesterday we saw AWC disappoint a few investors with its dividend although its still forecast to yield over 5% fully franked over the next 12-months. We didn’t love the companies result yesterday but I wouldn’t be surprised to see a decent recovery in the coming weeks after the stocks already fallen -18% from its pre-Christmas high, this is one resource stock that certainly hasn’t joined in the reflation party in 2021.

MM is watching our AWC position very closely, were not married to it!

Alumina Ltd (AWC) Chart

Recently we discussed WA miner IGO and on cue yesterday the stocks rallied well over 4% however as a useful read through on the current rally in the Resources Sector we still expect another 8-10% upside during this current leg up implying there’s no reason to exit positions in the sector for a while.

MM remains bullish IGO targeting ~$8.

IGO Ltd (IGO) Chart

Overseas markets

US markets were again mixed overnight with most major indices closing mixed after recovering from aggressive early losses, we still see fresh all-time highs in the coming weeks but we definitely appear to be in a period of “sell strength and buy weakness”.

MM remains bullish global stocks through 2021 albeit in an increasing volatile manner.

US NASDAQ 100 Index Chart

The Bitcoin euphoria is starting to unravel before our eyes, this week the crypto currency has already fallen over 20%. Our feeling is the Elon Musk inspired final surge in Bitcoin is over, especially from a risk / reward perspective.  Importantly the current reversal in bitcoin, which appears to be a major top and very likely a bubble peak the read through for stocks is ultimately bearish. From a correlation perspective the crypto has been an excellent leading indicator for equities with the lag is usually a few months meaning investors should be watching markets very closely this financial year – remember we are forecasting volatility and at least one 10-15% correction in 2021.

MM is now neutral / bearish Bitcoin.

Bitcoin ($US) Chart

Over recent weeks we have been discussing at length the 10-year bond yield, today I have taken a look a little further out, the US 30-years, they have more than tripled since last March and are now trading above pre-COVID levels. Simply everywhere we look we are seeing signs of an improving US economy and ultimately inflation, some interesting points came out of a the US Fed last night, from Chair himself Jerome Powell:

1 – The Fed intends to keep buying bonds even as the economy improves, a move that should keep short-term interest rates at extremely low levels.

2 – They are focused on employment & inflation but history tells us once the gene is out of the bottle the Fed will be brutal to stop the later rallying too fast.

3 – As the Fed maintains its Dovish stance we believe volatility will continue to rise as investors second guess what comes next.

However with so much now being written around bond yields and growth stocks weakness MM thinks some reversion is very close at hand in the short-term.

MM remains bullish bond yields.

US 30-year Bond Yield Chart

MM’s International Portfolio

No change, MM still holds 11% cash in our MM International Portfolio , while we remain bullish our opinion is a pullback is looming on the horizon. We touched on Bitcoin earlier and it’s one of a few indicators pointing to a potential correction, importantly I remind subscribers that while MM is positive stocks over the year we are anticipating some elevated volatility which should provide some excellent opportunities for Active Investors like ourselves.

Markets rarely move as planned / hoped but at this stage our ideal level time to move down the risk curve would be another test of overhead trendline resistance by the US S&P500 shown below, only 2-3% higher. At this stage its all about planning, we can see ourselves moving to 20% cash before say 5% but timing is important to add optimum alpha / value.

MM likes global equities through 2021.

US S&P500 Index Chart

Today I have looked at 2 different ways we are considering de-risking our International Portfolio in the weeks / months ahead.

1 ProShares Ultra Short QQQ ETF (SQQQ US) $US13.49

The ProShares Ultra Short QQQ ETF has a Beta of 2.4x hence a 5% investment for example quickly hedges 12% of our portfolio against a market correction.

MM will consider buying the SQQQ when we the S&P500 tests trendline mentioned earlier.

ProShares Ultra Short QQQ ETF (SQQQ US) Chart

2 Google Alphabet (GOOGL US) $US2063.

MM is showing a healthy ~65% paper profit on our Google position, I’ve included it today not because its top of our list to sell but more to illustrate that we expect fresh 2021 highs before a potential 10-15% correction.

MM may consider taking profit on Google around the $US2200 area.

Google Alphabet (GOOGL US) Chart

MM’s Global Macro ETF Portfolio

No change again, we remain basically fully invested in our MM Global Macro ETF Portfolio with a cash position of just 4%. This portfolio  remains heavily skewed towards “risk” which still feels on point but only just short-term, our core macro view of rising inflation / reflation hasn’t wavered but it has come a long way very quickly.  MM still believes value stocks outperform growth through the year with our main moves this year likely to be up and down the risk curve as we feel “Fear & Greed” travels too far in either direction, the “Greed” side of the ledger currently feels in control but becoming increasingly vulnerable.

As discussed earlier the bounce in US 10-year bond yields has continued this week but in-line with our “time for a rest” which might align with us locking in some “risk” profits in the weeks ahead.

MM likes the reflation viewpoint through 2021.

US 10-year Bond Yields Chart

Today I have updated the 2 ETF’s which are currently on top of our watchlist although as we said earlier our underlying macro view is unlikely to change more than once a year.

1 Invesco QQQ Trust (QQQ US) $US321.5

In line with our previous comments on US equities we are considering taking profit on our QQQ positions ~$US340 – we may well leave this as a resting order, watch out for alerts.

MM is looking to take profit on our QQQ positions ~$US340.

Invesco QQQ Trust (QQQ US) Chart

2 BetaShares Global Energy Companies ETF (FUEL) ETF $US4.19

Our exposure to global energy stocks has been rallying nicely and its now only 5-8% away from our target area, this is an option to take our money if we believe stocks are “topping out”.

MM is considering taking profit on our FUEL position ~$US4.50.

BetaShares Global Energy Companies ETF (FUEL) ETF Chart

Have a great day!

James & the Market Matters Team


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