Author: james Carter
How strong are the banks at present? The Australian Banking Index is finally enjoying some time in the sun rallying over 10% during the last month. Their results have not been as bad as feared by many and of course they received a big shot in the arm from the RBA when they lowered interest rates to 1.75%. Importantly the market is now factoring in over a 70% chance of another cut in 2016. Our local banks have endured a significant reality check since early 2015 correcting over 30% and putting some clear short term stress on many retail investor portfolios. Not surprisingly a significant percentage of the questions we receive at Market Matters concern the banks. We have been bullish our banks over recent weeks and thought today was an ideal time to quantify what we feel may come next from the back bone to the ASX200. ANZ have already gone ex-dividend this month and WBC / NAB will follow shortly so the sector is paying some excellent dividends for their loyal holders. Even after the recent rally NAB will yield + 10% fully franked over the next 12.5 months. It’s also important to note that In bear markets stocks regularly bounce over 35% of their decline which coincides with our minimum technical target area for the banks ~8400 i.e. another 5% higher – see chart 1. ASX200 Banking Index Monthly
How we intend to play Gold from here… Commodities tumbled last night as we’d predicted over recent weeks with Gold -2.2%, Oil -3.2%, Iron Ore -5.7% and Copper -2.5%. Obviously like all market calls we may ultimately be proven wrong but while prices unfold as expected “plans” need to be prepared to profit from these movements. Ultimately we believe this gold weakness will create some excellent buying opportunities but at this stage we continue to believe the banks will be the best performing sector in May, and perhaps June. Our main concern remains with the health of the iron ore and copper sectors however we believe Gold has an exciting 12 months ahead. Gold has rallied US258/oz (24.6%) from its lows of December 2015, topping out last week. Our current view is this initial advance is complete and gold will now undergo a significant correction to this year’s gains and we will be looking to buy this retracement if it unfolds. Last night gold ETF’s in the US were down over 6% and it will be interesting to see if this weakness continues locally. At this point in time the US1200/oz area is the ideal area to buy – see chart 1. Gold Weekly Chart
“Doctor Copper” remains bearish on the world economy Copper has long been famed for its ability to forecast the turning points in the global economy. Simply because copper is used in most sectors of the economy the demand for copper is often regarded as a reliable leading indicator for the world’s economic health. Rising copper prices indicate strong demand for the base metal and hence a growing economy but falling prices implies sluggish demand and a potential economic slowdown ahead / underway Technically we maintain our bearish view on copper, that we have held for over 2 years, targeting the 150 area, or a further 30% fall in prices – not a particularly aggressive prediction considering copper has already more than halved in price (see chart 1). It was interesting that copper did not get too excited when iron ore and oil enjoyed explosive short covering rallies of late. Copper is topical at the moment as last week we saw Rio Tinto (RIO) give the green light to their Oyu Tolgoi copper project, with the commitment to Phase 2 (underground) expansion with a capex investment of US$5.3bn for 1st production in 2020 and full production in 2027 at a run rate of 560ktpa between 2025 & 2030. It’s clear right now the Copper market is oversupplied and will be until at least 2018, which is supportive of our bearish case scenario for the metal over the next 12-18 months HOWEVER, on most assumptions, the market becomes more balanced and prices should track higher up into this projects guided time frame. So, lower prices first, another 30% in our view before a recovery plays out. Copper Monthly Chart
Is there still value in the strong REIT’s sector? The REIT’s (Real Estate Investment Trusts) sector has rallied strongly since the recent interest rate cut albeit without the fanfare of the local banking sector. The REIT sector is up 3.6% over the last 5 days with four of the sector heavyweights rallying over 5% during the same period. Today we will look at these four stocks as we continue to search for value, plus risk / reward, in today’s volatile market. The press has recently been full of the risks for the Australian property market making many investors shy away from the correlated REIT sector. The REIT’s own property and derive income from rental returns hence the below are some of the obvious factors relevant to the sector:
Do we see opportunities in the stocks that have recently been smacked? We are currently holding an aggressive 40% of our portfolio in cash and are hence scouring the market for solid risk / reward opportunities in stocks / sectors we like. As our subscribers know, at times, we are not afraid of buying stocks that are totally unloved, hence today we cast our eyes over 3 large cap stocks that have literally plummeted over the last few days.
Really bullish, there's more to go in the reflation rally
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