Morning Report / Overseas Wednesday – International Equities & Global Macro Portfolio (Z1P, A2M, NWH, FMG, BHP, 2318 HK, ZM US, BC US, VXX US, COPX US)

The ASX200 posted its highest close in almost 12-months yesterday with the Resources Sector surging higher e.g. BHP Group (BHP) +2.7%, RIO Tinto (RIO) +3% and OZ Minerals (OZL) +4.4%. Only 56% of the index closed higher but when the big end of town rallies strongly the index follows suit and on Tuesday the banks and CSL Ltd (CSL) all supported the stellar advance by BHP et al sending the index up to within 1.2% of the psychological 7000 area – we’ve said a few times over the last 12-months that the “easy trade” was to move into cash but MM still felt stocks was the way to go, this view remains intact.

MM’s last 3 purchases, all made in February, are looking great which is hopefully not tempting fate with 2 of them already fairly close to our initial target area:

1 – OZ Minerals (OZL) $20.92 - when we went long our initial target area was $21.50-$22, there is only a small, short position in the copper miner hence the nature of any break to fresh all 2021 highs above $21.25 will be interesting.

2 – Aristocrat Leisure (ALL) $33.55 – similarly when we went long our initial target area was ~$36 but the stocks all-time high is $38.23 which could easily be tested this quarter.

One of the points I’m trying to make is while we are bullish equities through 2021 the risk / reward has diminished significantly short-term following the markets 6% rally from this Februarys low. Hence any buying moving forward is likely to be very stock specific as opposed to sector / market orientated. Our underlying market view remains in tact and my “best guess” when MM will move down the “risk curve” is in a few months but not yet, overnight BHP popping ~$2 higher illustrates how the path of least resistance remains up.

Overnight US indices were quiet and mixed, the SPI is calling the ASX200 to fall early on which is a slight surprise with BHP trading very strongly in the US.

Reporting today we have: (stocks we hold in yellow): ABP, AHY, BAP, CAR, CHC, COL, CWP, DMP, FBU, INA, LIC, ORA, PGH, SUL, TAH, TGR, TWE, VCX, WEB, WHC. Plus see a full list on the Market Matters reporting calendar here.

Below I cover CAR, BAP, EML, EVN, WHC,

MM remains bullish the ASX200 through 2021.

ASX200 Index Chart

Please excuse the almost repetitive coverage of Zip Co (Z1P) but its not often we enjoy an ASX200 holding more than double in just 3-weeks. This tale of woe for the shorts is getting more painful by the day with the latest report (basis 10th February) showing a still considerable 4.3% short position but it has fallen almost 3% over the month confirming our view that some of the current rally is being fuelled by aggressive / forced short covering – often an opportune time to take some profit.

I was chatting with a colleague about our Z1P position yesterday and he said it’s hard to trim a already relatively small 3% holding but in real terms following the stocks aggressive rally our 3% position is now indeed the equivalent to 6% making the exercise far simpler. While we won’t reduce the portfolio weighting on the MM site, we are suggesting to trim positions back to around 3-4% and will be making this move in the Market Matters SMA.

MM is advocating trimming $$ our of Z1P into current strength

Zip Co Ltd (Z1P) Chart

MM has been flagging a potential foray into a2 Milk (A2M) if we saw a failed spike under $10 which is exactly what Tuesday gave with the stock reversing higher on good volume. The company reports on the 25th and perhaps the 6.4% short-position is becoming nervous, we saw what happened to Z1P – we are considering a speculative play with a small initial weighting ahead of their result, leaving ammunition to add to the position post results.

MM likes A2M around $10.

A2 Milk Co Ltd (A2M) Chart

Another stock that reversed higher yesterday was NRW Holdings (NWH) which finally closed up +4.5%, we’ve discussed this engineering business a bit earlier after missing a healthy profit opportunity above $3 but after correcting almost 20% we are now comfortable with the risk / reward again at current levels. Some pundits suggested the stock rallied on the back of the successful acquisition of Primero, but we felt this was inevitable although certainly it’s a great strategic $100m deal for NWH.

We obviously remain open-minded but the correction feels over and as we’ve seen with a number of stocks this month when the selling abates in this market recoveries are often sharp and fast.

MM remains long & bullish NWH medium term.

NRW Holdings (NWH) Chart

Fortescue Metals (FMG) came out with a poor announcement yesterday that we didn’t cover in the PM note when we should have. They announced a string of management changes as a consequence of cost overruns at their Ironbridge Magnetite project, and a lack of communication around these overruns which implies ‘cultural issues’.  Firstly, Magnetite projects are notorious for cost overruns as they involve processing of ore, not just shovel and ship operations. In any case, to see an exceptionally competent COO (Greg Lilyman) depart immediately raises questions which (we’re told) will be answered tomorrow when they report earnings. This is not positive and when we think about RIO’s current reputational issues and a hit to FMG’s credibility yesterday, BHP is coming our smelling of roses, and is now the world’s lowest cost Iron Ore producer.

MM is now cautious FMG preferring BHP

Fortescue Metals (FMG) Chart

Overnight BHP surged 8% on the US ADR market to reach levels not enjoyed since 2012, its recent report and large dividend is clearly getting the thumbs up on closer inspection. We remain bullish and will regard any 10-15% pullback as a buying opportunity.

MM remains bullish BHP.

BHP traded in the US Chart

Overseas markets

US markets were mixed overnight with most major indices closing basically unchanged. The small cap Russell 2000 has been the clear outperformer but even this runaway train is starting to “feel” a little stretched and in need of a rest.

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

US Russell 2000 small cap Index Chart

As we can see from the chart below the market has regained a degree of its bullishness but its far from being too complacent. The trading range is becoming obvious – be cautious above 50 and aggressive buyer below 25, as always not a perfect science but one that should also be on the list of indicators worth monitoring carefully.

MM remains bullish stocks over the coming months.

AAII Bullish Sentiment Reading Chart

MM’s International Portfolio

After selling Visa (V US) we now hold 11% cash in our MM International Portfolio , while MM remains bullish we do feel the air is getting a little thin short-term but the chart below illustrates the acceleration to the upside could easily flow through into 2022, as we say almost at nauseam the surprises usually occur with the trend and there’s no doubt the direction of that is up! However 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.

Hence today we have updated the stocks MM is most likely to sell and a new one I particularly like which hopefully is not too influenced by my love of boats!

NB There is a clear propensity with our selection to cut our underperformers as the quality continues to shine in today’s market e.g. Visa (V US) mentioned above.

MM likes global equities through 2021.

MSCI World Index Chart

1 Ping An Insurance Group (2318 HK) $HK90.50

Chinese Insurance giant Ping An continues to struggle above $HK100 and we feel there are better opportunities elsewhere to gain exposure to China, especially in the tech space where we feel they are likely to perform strongly in the years ahead.

MM is still considering taking a small profit on Ping An around current levels.

Ping An Insurance Group (2318 HK) Chart

2 Zoom Video Communications (ZM US) $US442.75.

MM has been reviewing our position in Zoom since giant Microsoft (MSFT US) announced its intention to enter the video conferencing space, the stocks bounced well of late after being smacked over recent months providing a reasonable exit level as it makes new 2021 highs.

MM is considering taking profit on Zoom into its 30% positive recovery.

Zoom Video Communications (ZM US) Chart

3 Brunswick Corp (BC US) $US92.12.

Brunswick Corp (BC US) is a new company for the MM reports, this $US7bn Illinois based business manufacturers outdoor consumer products including marine engines e.g. the popular Mercury outboards. They have just launched a V12 600HP outboard which looks set to be a huge success with the new trend of bigger boats using outboards plus for good measure we have a surge in global boat sales.

Last month the company beat expectations when it delivered revenue of $US3.4bn and earnings per share (EPS) ~4% above expectations. The company’s set to increase sales year on year by an estimated 12% leading to a similar increase in profits. On an Est P/E for 2021 of just 14.4x this is an attractively priced growth stock with some meaningful tailwinds.

MM is bullish BC at current levels.

Brunswick Corp (BC US) Chart

MM’s Global Macro ETF Portfolio

No change, we remain basically fully invested in our MM Global Macro Portfolio with a cash position of just 4%, the portfolio remains heavily skewed towards “risk” which still feels on point for now, our core macro view of rising inflation hasn’t wavered. MM still believes value stocks will 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 – by definition this may only be 2 major moves through the year which is not unusual for a macro portfolio i.e. it’s unlikely MM will change our core view too often.

The bounce in US 10-year bond yields has continued this week but in-line with our “time for a rest” view another period of consolidation wouldn’t surprise however we remain bullish and cognisant that surprises are still likely to be on the upside. This rally in longer dated bond yields theoretically favours the Resources & Banks over the IT stocks.

MM likes the reflation viewpoint through 2021.

US 10-year Bond Yields Chart

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

1 iPath S&P500 VIX Short-term Futures (VXX US) $US15.76.

This unleveraged billion dollar ETF has now fallen 28% from its late January high, in our opinion this is currently a far better hedging / defensive vehicle than being short indices themselves especially as we believe a 10% pullback is probably still a few months away. Hence as we are committed to our view that 2021 will be a volatile year MM expects to be long the VXX at some stage this year.

MM likes the VXX around 15 leaving some flexibility to average into weakness.

iPath S&P500 VIX Short-term Futures (VXX US) Chart

2 Global X Copper (COPX US) ETF $US36.24

We have been discussing copper in some recent morning reports, we had been confident the COPX ETF would make fresh 2021 highs above 35 which is now showing a pleasing 100% return on our position. This portfolio is all about showcasing our 10 top macro calls in an actionable format i.e. with associated ETF’s. While COPX has now traded above our long stated 35 target region, we remain bullish the reflation trade, and that includes copper, although given diminishing risk/reward, we have now lower conviction.

MM is tempted to take some profit on our COPX above 35.

Global X Copper (COPX US) ETF Chart

Have a great day!

James & the Market Matters Team

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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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