Australian Investment Blog

Firstly we are very sorry for the late Weekend Report yesterday, unfortunately, a few of our team were out of town over the weekend and they experienced poor internet connectivity. Basically, all this week's questions are around the US election hence here are our thoughts in a nutshell barring any last minute bombshells. Nobody needs any reminder that this week is likely to be all about "Clinton v Trump" - this Tuesday US time. Markets have endured a rough ride into the election with US stocks falling for 9-consecutive days and the local ASX200 plunging 250-points (4.6%) over the last 2 trading weeks. Unlike BREXIT which caught markets totally off guard, a potential Trump victory has been analysed from all directions and to a certain degree built into prices.

While a Trump victory will stun many people worldwide markets have now been bracing for this outcome for a few weeks, clearly with significant trepidation. A Trump victory, often forgotten to be the representative of the Republican party, is still likely to increase volatility in markets short-term. Trump wants to increase spending and cut taxes which is bullish for stocks but his protectionist views and overall unpredictability is bad for stocks. On a sector basis:

1. A Clinton victory is perceived to be bad news for drug makers and finance companies.

2. A Trump win is more of an overall market risk as the US stock market is close to all-time highs and far from cheap.

Our View

1. Clinton will win but Republicans will still control the house of representatives, the US stock market will snap back ~4% - not as much as many think.

2. The ASX200 will recover ~100-points but unfortunately, we remain negative local stocks and believe selling will soon return. A close back over 5400 is required to change our pessimistic view.

3. We were extremely bullish in early 2016 when stocks were hammered under 4800 and went limit long. Regrettably, we believe today's degree of negativity has far more foundation.

ASX200 Weekly Chart

1. Investing Plan

Due to our concerned outlook for equities moving forward any buying needs to be thought out clearly. Plenty of stocks rally in poor markets but the majority clearly fall. This week it's critical to have a well-thought plan otherwise running with the heard during periods of significant volatility is rarely profitable.

Notably, we are only targeting stocks to buy that have recently been "beaten up" which ties in with both our view that an active approach is required moving forward and the overall market is not a buy.

1. Buy REA Group (REA) around $40, the stock has already fallen 27% from its highs this year but our ideal buying area remains well over 10% lower, hence likely one if we get panic selling after a Trump victory.

2. Westfield (WFD) has fallen 23% since we turned bearish around $11. Technically we are now positive under $8.60, with stops under $7.90. A minimum 10% bounce feels likely while the stop is around 7% lower.

3. Healthscope (HSO) has fallen over 30% after a recent poor report. However we are big believers in the company's business model moving forward, the government needs private health as it fights to retain its triple AAA rating. We bought 5% at ~$2.30 and are keen to add an additional 3% under the $2.15 area which is very close.

2. Trading Plan

1. Fortescue Metals (FMG) has been both a very strong and volatile stock in 2016. We are trading buyers around $4.80, around 9% below Fridays close. The stock has corrected this degree a few times this year and does not need the US election to give us our buying opportunity but with only a few days to go, a spike lower for stocks is needed for our level this week.

2. TPG Telecom (TPM) has recently been hammered around 45%. The Telco sector seasonally performs well in November . For the aggressive trader, we believe TPM is excellent risk/reward around this $7 area with minimum 10-15% upside.

Summary

A very mixed bag for our trading plan into the election with one investment and one trading opportunity likely before the US result and the balance likely if we get panic selling:

Slight Weakness - Add to HSO under $2.15, WFD around $8.50 and TPM around $7.

Panic selling - Buy REA ~$40 and FMG ~$4.80.

NB We currently sit on 21% cash but it feels it's prudent to only consider one investment opportunity prior to the election. Psychologically we want decent cash levels if markets get hammered on a Trump victory.

Overnight Market Matters Wrap

• The S&P put in a record-breaking move on Friday, closing down nine consecutive days, its longest streak in 36 years. The S&P closed down just 3.5 points (-0.2%) to 2,085.18, and over those last nine trading days has fallen 3%. The Dow followed suit, dropping 42.39 points (-0.2%) to 17,888.28.
• Major concerns were again focussed on the upcoming election in the US and there is no doubt that it will be a close run.
• The oil price dropped again on Friday after tensions rose between Saudi Arabia and Iran which made traders wary that the production cut promised by OPEC would be in jeopardy. Oil finished down 59c (-1.3%) to US$44.07/bbl, and for the week was down -9.3%, the largest weekly decline since February.
• The December SPI Futures is indicating the ASX 200 to open down 39 points this morning, testing the 5,141 area.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 7/11/2016. 7.30AM.

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