Australian Investment Blog

Answering subscribers questions

Following recent feedback we are now starting to use Monday morning reports to answer subscriber questions given the Weekend Report covers our market views very comprehensively - hence please keep the questions coming and we will attempt to address as many as possible, including the tough ones! Obviously, this format may change at times if market moving events happen after Sundays Weekend Report is released.

Question 1 - I think that the next year or more that the index will be range bound and the opportunities will be in "pockets "of opportunity that hopefully ( with your help) I can make some profitable. While you are intending to do predictions for next year I would be interested in what you predicted for last FY as a learning experience. For example best calls, worst calls and the whys and learnings. I would hope your subscribers don't think you don't make mistakes as it is inevitable with investing. I think also that sometimes when nothing is happening it's worth reminding investors that often doing nothing is wise and that you can't always have BUYS. - Philip.

Answer - Morning Philip, a great but very encompassing question that we’ll do our best to answer, starting with a retrospective look at our views from the start of 2016 - View our 2016 outlook piece here: https://www.marketmatters.com.au/blog/2016-outlook/

Best : US stocks would make fresh highs in 2016 (now 6pts away for the S&P 500), buy resources for the first time in many years, sell $US earners as we forecasted a top in the $US and buy gold.

Worst: We thought the ASX200 would be an outperformer for the first time in a decade. The underperformance from the banking sector has been another drag and although we made good calls to sell banks at higher levels, we bought back into the sector too early, and our portfolio weightings are too high given the current regulatory. In short, although we anticipated a range bound environment for the sector, we did not anticipate the depth and time of the recent decline.

Overall, we believe our views have been good over recent years but the main area for improvement is the implementation of these views, for example, we were upbeat on Gold at the start of the year, wrote about it many times, traded stocks in the sector yet right now, when the explosive upside move has played out, we do not have a gold stock in the portfolio. Running profits is the area we are channelling the most efforts to improve in 2016.

Question 2 - Hi, Just wanted to say that your call on CSR was way ahead of the financial pack. I kept on asking my FP if he had heard anything on CSR and then all of a sudden it appeared from nowhere onto a couple radars as strong conviction!! Congratulations!! Your call on MQG seemed well timed as well - a shame that Brexit came along but then again, it gave me a great buying opportunity as I am always slow off the mark to buy anything! You mentioned in your current report that you felt a bond bubble was forming reflected by the increasing negative bond returns. Could you please explain what the fallout would be should the bond bubble burst please and how this would impact our portfolios? Also, What are your thoughts on QAN please? - Terry.

Answer - Morning Terry, firstly, our concerns over a bond bubble are a large macro observation at present. Simple logic suggests that Swiss negative 50-year bond yields are sheer lunacy - for example, if you invest $1000 now you are guaranteed to receive $850 back in 50 year’s time (assuming the Swiss Govt remains solvent!) This does not look overly attractive to us!

We believe rates will rise over the years ahead with the pertinent question more about timing. Our view is clear; when investors smell higher global rates they will pile out of bonds sending interest rates sharply higher = bad for the economy and stocks if the increase in rates is aggressive.

Australian rates may be heading towards 1% over the coming 12 months but a revisit to 5% over the coming 5-10 years is a high probability. Great companies like Sydney Airports, Transurban, Property stocks etc have all been bid up on a combination of earnings growth and low-interest rates. Low-interest rates have magnified their rally. When that trend changes, it will have a negative impact on share prices.

RBA Cash Rate Monthly Chart

Secondly, casting a quick glance at QANTAS bearing in mind that airlines generally have poor economics and overall are bad investments. We are neutral QAN at best, we believe the strong rally to the $4 area due to the recent oil price collapse (lower fuel costs) was likely to have been an excellent selling opportunity and we are yet to see any reason to buy the stock.

QANTAS (QAN) Monthly Chart $3.54

Question 3 - I’d like to hear what the plan is regarding our disastrous purchase of MQG and HGG, are we holding for a bounce or cutting our significant losses? Your messages of late have been confusing - Anthony.

Answer - Morning Anthony, obviously like yourself we are not happy with our purchases of Henderson (HGG) and Macquarie (MQG) as they stand now. They looked excellent prior to BREXIT and were showing profits in excess of 5%, however, the surprise result has clearly "moved the goal posts". Both stocks are cheap and have significant leverage to the market. Our overall bullish outlook for equities over the months ahead has helped us to stay patient on these two stocks, and indeed we have averaged into both stocks into this decline. We are now looking to exit these positions at more palatable levels. Currently, our target to cut our losses on HGG is just over $4. We believe the stock has been oversold assuming the British Pound is able to hold the current 1.29-1.30 region - a weakening pound results in lower profits for Australian investors as HGG earnings are from the UK. Last week's stability even after HGG froze a property fund was a good sign the stock has found a base.

Henderson (HGG) Daily Chart $3.54

MQG continues to trade in a choppy manner between $55 and $87 and is currently unfortunately at the wrong end of the range. MQG trades on 11.1 times forward earnings, so is super cheap relative to the market, is a high beta play, so if we see the blow off style top coming into US equities as we expect, then Macquarie should do well from here. We remain optimistic that we can exit MQG without a loss i.e.in the mid / low $70 region.

Macquarie Group (MQG) Monthly Chart $67.20

• The US markets finished higher on employment numbers, showing signs of an economic recovery. The Dow finished up 251 points (+1.4%) to 18,147 and the S&P500 closed up 32 points (+1.5%) at 2,130.
• The Non-Farm Payrolls numbers were released on Friday with a strong uplift of 287,000 new jobs being created, after an expected number of 175,000.
• With the jobs number being strong it was not too unexpected to see gold weaker. Gold weakened US$3.70 (-0.3%) to US$1,358.40/oz
• Oil was stronger, up 27c (+0.6%) to US$45.41/bbl, helping to keep the mood positive into the end of the week.
• The September SPI Futures is indicating the ASX 200 to open a lot stronger this morning, up 70 points to the 5,300 level, and possibly higher after a Government has finally been formed.

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 11/07/2016. 9:00PM.

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