04 December 20
Nuix hits the boards
04 December 20
Nuix hits the boards
04 December 20
Iron ore surges, are we long enough? (A2M, TWE, FMG, RIO, BHP, VALE US)
03 December 20
Iron ore takes flight (MQG)
03 December 20
Coal is threatening to rise like a phoenix (CRM US, WHC, NHC, YAL)
02 December 20
ASX holds steady as Sydney returns to the dancefloor, GDP ahead of expectations (NWH, Z1P)
02 December 20
Income Note: The future of wealth management, according to IOOF (IFL, CLW, IGL, SIQ)
02 December 20
Overseas Wednesday – International Equities & Global Macro Portfolio (BIN, TWE, TTD US, ZM US, GOOGL US, WFC US, SVXY US, VGK US)
01 December 20
ASX rallies, lots of Aussie’s buying Pizza & KFC, IOOF outlines future of wealth management (CKF, DMP, IFL, SFR, ABY)
01 December 20
3 “elastic bands” MM considered in the last 24-hours (CBA, CGC, TWE, MFG, PPT, RHC, CSL)
30 November 20
ASX books best month in 30 years, Treasury Wines (TWE) hit hard, IT stocks see some love again
This morning the SPI futures are calling the ASX200 to open up around 50-points after a strong performance on Wall Street which saw the likes of BHP rally ~2% in the US. Again the “recovery story” looks set to lead the pack after the Energy Sector surged almost 4% on Friday night compared to the IT sector which gained less than 1%, investors remain comfortable to look through the current awful COVID picture in the US following Pfizer’s vaccine announcement. With earnings turning higher and a global reopening on the horizon the optimists are in in charge at present and we see no reason to the fight the uptrend until further notice.
On the weekend Australia successfully partly divested itself of full dependence on China for trade by signing the world’s largest free trade agreement between 15 Asia-Pacific countries – the significant group includes China, Japan and South Korea. When combined with the fresh hopes on trade that Joe Biden may bring forth in 2021 the potential macro headwinds appear to be slowly diminishing for the ASX. China has been flexing its control muscles of late hopefully culminating with the delay of Alibaba’s (BABA US) IPO of Ant Financial, a few positive noises from Beijing and the ASX200 could be at 7000 before we know it.
It feels to me that China is simply playing the “long game” which runs through its culture from the family all the way to the government. They will almost inevitably become the world’s largest economic power in the future and legendary investor Ray Dalio is already saying he needs to have a significant portion of Bridgewater’s portfolio in Chinese assets. Currently they are setting some sensible boundaries to stop businesses becoming too big, a move the US would probably have instigated if a “blue wave” had been forthcoming in the recent win for Joe Biden, it’s an easy path to comprehend when you consider the GFC.
MM remains bullish Australian stocks in 2021.
ASX200 Index Chart
Locally, the Victorian Government announced a large scale (~$5bn) stimulus package focussing on social housing, obviously a positive for the construction sector however we think this will be a roadmap for other State Governments to follow. Australia could well be entering an infrastructure boom which makes total sense given the need to stimulate an economic recovery, the historically ‘cheap’ cost of capital, and the long term benefit that well throughout and executed infrastructure provides.
The recent weakness being witnessed by the US Fear Index offers good support for the bulls and while the risk / reward is no longer particularly attractive for the sellers at least a few weeks “sideways consolidation” with a downward bias feels very likely i.e. a bullish backdrop for stocks.
MM remains mildly bearish the VIX.
US Fear Gauge (VIX) Chart
Over the weekend Germany announced that the country would live with tough restrictions for the next 4-5 months as the European nation strives to avoid slipping into an open-close-open economically damaging cycle. On Saturday the European powerhouse registered over 22,000 fresh cases as any doubts about the countries problem have been dismissed, a quick glance at the chart below should leave subscribers in no doubt of the battle ahead. However as we know from Victoria if you take the tough medicine the results can and will be very rewarding and history does tell us the Germans can be very efficient when the put their minds to things.
MM prefers European equities over the US moving into 2021.
Confirmed Cases of COVID in Germany Chart
As always, thanks for the questions, a more stocks specific focus this morning.
“Greetings and keep up the informative commentary... What's the summary for the recent goings on at SXL? Doubtless it's bad but why are they doing this and what's it means for them and investors?” - Cheers! Dave B.
In late October Southern Cross Media (SXL) announced full year revenue was down over 18% to $540m with COVID the major earnings headwind, an ok result considering how many businesses aggressively reined in their advertising through the uncertain times. History tells us that advertisers ramp up spending when the economy is improving hence SXL should see trading conditions improve in the months ahead.
In terms of the recent share consolidation, this is not a ‘bad’ update. They have simply consolidated the number of shares on issue on a 1 for 10 ratio. i.e. for every 10 shares you hold, you now own 1 however the price is now 10 times higher. On current prices of $1.93 the pre-consolidated price would be 19.3c. Companies do this for a range of reasons, however ultimately, it brings their stock out of the ‘penny dreadful’ area of the market without having any influence on shareholder value.
While this is not one for MM, media businesses like SXL are very leveraged to economic recoveries, and if we held, we’d continue to hold to see if they can take advantage of improving conditions.
MM is neutral / positive SXL short-term.
Southern Cross Media (SXL) Chart
“James and team. I notice a significant reduction in the share price of CLW today. Do you have any insights to what may have caused this?” - Thanks Colin H.
Charter Hall Long Wale REIT (CLW) which MM holds in our MM Income portfolio was sold off fairly hard last Tuesday as a direct result of rising bond yields. This is a property REIT that has long term leases, and rising interest rates are a negative for such exposures. However after touching 1% last week Australian 10-year bond yields again backed off, until we see a sustained break above the psychological 1% level CLW should remain well supported courtesy of its almost 6% forecasted yield over the next 12-months.
MM likes CLW below $5.
Charter Hall REIT (CLW) Chart
Australian 10-year Bond Yields Chart
“Hi James, In your newsletter you list buys and sells within your global ETF portfolio. The stocks you mention are often not on the ASX. For example you indicated interest in the VGK ETF to gain exposure to European equities. Would Vangard's VEQ be the matching ASX product? For those of us who only operate within the ASX, any chance of naming the ASX parallels (if they exist - perhaps with commentary if there are extra considerations) of the international codes you provide (especially in the ETF space).” – Thanks Alain M.
A very good point and one that is well and truly in line with our thinking. One feature on our new site which is soon to be launched is a feature that looks as specific ETFs available to trade themes, i.e. if we look at Europe we will list 3 or so ETF’s that would give exposure to this theme and provide details on each that are easily searchable on the site.
There are a few major differences between the 2 European ETF’s mentioned including currency denomination, hours of trading and of course size with the US VGK’s market cap at $US13.2bn compared to the local VEQ at $191m. However they both have the same objective which is to mirror the performance of European equities hence their results are likely to be very similar.
MM is bullish the VEQ ETF.
Vanguard FTSE Europe Shares ETF (VEQ) Chart
“Hi James and team, Can you please give me your thoughts on Bitcoin? I bought Bitcoin at US $14,700 currently at US $16,180. This is the first time I have bought Bitcoin and was wonder where you see it reaching in the short term and long term. I bought RMS at $1.845 after its fall from $2.34, would like your thoughts on the short term and long term outlook.” – Cheers Craig B.
Bitcoin is not an asset MM has ever invested in, but we do occasionally reference it as an indicator of free cash / speculative dollars in circulation. Like equities Bitcoin has performed very strongly since March and we believe this rally looks likely to extend further into 2021 however after the strong advance since September a period of consolidation feels likely short-term.
MM is bullish Bitcoin into 2021.
Bitcoin ($US) Chart
Gold stock RMS has struggled of late like much of the sector but around 5-8% lower we believe the risk / reward is becoming far more attractive for RMS. This has been one stock and sector that has struggled following the positive update from Pfizer as optimism towards an global economic recovery sooner rather than later gathers momentum.
MM likes RMS around $1.80 with stops under $1.45.
Ramelius Resources (RMS) Chart
“To James and Crew, here are a couple of questions for Monday, if you can. Does CSL commencing the production of a COVID-19 vaccine warrant a re-rating? With FMG announcing moves into energy production positive or negative in the short term? Any thought on why REA is up approx. 17% this month.” - Many thanks. Cameron A.
CSL $309.46 – After underperforming the ASX in noticeable fashion since March CSL is finally embracing the market optimism. At this stage I would regard the COVID vaccine for CSL as a tailwind as opposed to a re-rerating situation. MM now likes CSL for the first time in many months with stops below $304.
FMG $16.59 – We believe this major bulk commodity producer will be driven by the price of iron ore for the foreseeable future, we remain keen buyers into weakness but well under $15. In terms of their announced move into energy production and the broader concept of sustainability, it was a central component to their recent AGM, they are absolutely serious about it and the numbers they talked about are staggering, setting a zero operational emissions target by 2040. From a SP perspective, targets like this are a short-term negative, hence some pressure on the share price recently. Ultimately this could be the catatlyst we need to see the price nearer $15.
REA $138.17 – the property market in Australia continues to defy the bears and REA is well positioned to benefit from this backdrop as it enjoys a recovery in listings / turnover.
MM is bullish REA while it holds above $125.
REA Group (REA) Chart
“Hi there I’m a fairly new member and am enjoying the news and insights on here . I’m retired and invest to be self-funded. So naturally shares are particularly attractive at present especially if franking is included . Equally important is to preserve our capital . Recently I’ve been looking at AGL as an income share and while yields seem attractive I recall some announcement saying no franking for a few years as well as recent comments that wholesale electricity tariffs are lowest they have been for some time And the share price has dropped considerably in recent times . So .....I’m a little tentative to buy AGL but it does appeal as income generation and perhaps some share price recovery . Do you guys have any thoughts” - Thanks and cheers Shane B.
AGL has unfortunately been a vehicle of wealth destruction since 2017 and it’s a brave investor who chases this stock for its ~7% yield. There are a lot of uncertainties with AGL at the moment, and this is shown through their stated FY21 profit guidance of $560-$660m, which is a huge range plus it also includes $80-$100m in one off gains (i.e. gains that will not be repeated). Strip those out and we get a business doing $480m-$580m in profit for the year ahead, which is down from $816m in FY20.
While the stock looks ‘cheap’ on 13x FY21 expected earnings, there are a lot of risks around these earnings. My “Gut Feel” is AGL that will hold around current levels however the downtrend is entrenched and this is not one for us.
For income focussed investors, predictability of earnings and therefore dividends is important. For high, fairly predictable yield outside the banks we currently like Abacus (ABP), Telstra (TLS) & Smart Group (SIQ) to name a few.
MM is neutral AGL.
AGL Energy (AGL) Chart
“Thank you, James, for this weekend’s report, could be exciting times! Your final words of the report were - we will be selective I took that to mean that your selections will revolve around stock purchases from stock sales. What would be your position/selections if you had spare cash reserves ?
Not unlimited of course!!” - Cheers Mike D.
A great question which I will answer succinctly with a mix of stocks we hold + a few we don’t. We like Banks here and hold CBA and NAB – we would be happy buyers of either one as we have done recently. We are targeting a buy in Fortescue (FMG) into weakness below $15, we view Ive Group (IGL) as a high risk recovery play that will do very well if the economy kicks into gear supported by a share buy-back (note high risk), and we are bullish Energy, holding Beach Energy (BPT) in our growth portfolio however we also like Santos (STO).
Two others if required would be IDP Education (IEL) as an aggressive reopening play even though its already rallied strongly this month plus CSL Ltd (CSL) mentioned earlier.
MM is especially keen on the Energy Sector at current levels.
Santos (STO) Chart
“Hi James & Team, COVID-19 appears to be out of control in America. How do you rate the probability of a full or partial lockdown in the U.S. & its impact on the market? I read somewhere that Webjet & Corporate travel both derive over 80% of the revenue in overseas. Is that correct? If so, which of the two stocks would you say has a better prospect to the reopening thesis?” - Sidney H.
I believe Joe Biden and the individual states will ultimately steer the US down a lockdown path of sorts, perhaps similar to Germany but in our opinion, this is already built into markets. Hence, we see no great adverse impact on CTD / WEB in the medium term although short-term knee jerks often occur, we would regard this as a buying opportunity.
NB We prefer CTD over WEB.
Webjet (WEB) Chart
Have a great day & week!
James & the Market Matters Team
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