Australian Investment Blog

Donald Trump's immigration actions over the weekend appear at least in the short-term to have put the brakes on US stocks as the Dow plunged over 200-points at one stage in its overnight session. The market has been totally in the "glass half full" camp since his election victory last November but we feel the growth euphoria is ready to evaporate as concerns are likely to grow around potential trade wars.

The new US President, unlike many politicians, is simply implementing his election promises but these also included huge tariffs to be levied against China. If we see the outbreak of a global trade war the world's economy could easily slip back into the recession it is struggling to leave behind after the GFC. We now believe this potential outcome will be enough to see US stocks correct ~4%.

US Dow Jones Daily Chart

One tangible way of measuring the effect that Donald Trump is having on people is via the "Migration Fear Index" which has hit a record high - this index basically counts certain words in news stories around migration / immigration. These worries confirms to us that this year will be a choppy one at best for equities with emotional swings extremely prevalent. That sort of trade is very typical of a market top – emotional swings, choppy price action and a very convenient reason to justify it!

The US Migration Fear Index Daily Chart

While the local market held the 5600 support last week our preferred scenario after both yesterday’s weakness and our view for US stocks is we are likely to see a test under this level. Assuming the market does not accelerate below 5600 we will maintain our "buy weakness, sell strength" mantra.

ASX200 Daily Chart

Yesterday we unfortunately saw another local stock trading on a high p/e smashed when its earnings numbers disappointed - Aconex (ACX) closed down a massive 44%. As we mentioned in yesterday afternoons report we are giving ACX a wide berth but it does illustrate perfectly that old fashioned valuations should not be ignored because the market can, and often does, re- focus on the them very quickly. The concept of having a ‘margin of safety’ in stocks is important as left field events regularly crop up. Who would have thought that ACX would be impacted by BREXIT & Trump, but they were and when growth fails to materialise in a stock on 84 times earnings, the outcome is very harsh.

Another important point of note is that local stocks that have been hit hard due to excessively optimistic valuations are not recovering quickly following a downgrade hence investors can and should be patient.

Simple valuation comparisons is one of the reasons we like currently out of favour Henderson (HGG), we are looking to add to our position in HGG under $3.60.

Aconex Ltd (ACX) Daily Chart

We continue to want to buy pullbacks in the resource sector with the belief that the sector is likely to see further gains in 2017 but we are being fussy on entry after the strong gains since 2016. Our preferred stocks are currently a touch boring but its where we see the best risk reward - RIO, BHP and OZ Minerals.

Summary

We remain sellers of strength and buyers of weakness which is currently unfolding nicely as anticipated.

Overnight Market Matters Wrap

• Worst equity market drop since the election. DJIA loses 0.8%, S&P 500 down 0.86% and the NASDAQ off by 1%.
• All S&P sectors down with Energy the worst at minus 2.2% and Materials off by 1.25%. Consumer Staples the best at down 0.1%.
• Technology stocks weak on immigration concerns with Alphabet losing 2.3% and Facebook 1.2%.
• The ASX 200 is expected to continue the current weakness and open towards the 5,,650 level as indicated by the March SPI Futures this morning.

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