It feels like the Market is Finally Listening to Us
The Australian market came under significant pressure yesterday, falling almost 1% with the selling volume in the futures market around 30% above the daily average – usually a negative indicator. The ASX200 is actually now negative for 2017 before dividends, clearly illustrating investors need to be a little more active than over past years /decades. Those people that simply look at the Dow for an idea of how our market is likely to perform would have been shocked by the continuous selling / 54-point slump by local stocks, but it can be it can be easily explained when we consider the global picture:
1. The ASX200 is a very high yielding market in global terms. Hence over the last 8-10 years, our market has been a home for local and offshore investors chasing yield as global interest rates have been effectively zero and often negative!
2. When bond yields / interest rates start to increase like now, Australian equities feel the weight of money withdrawing, leading to declining stock prices.
3. The “yield play” is the most vulnerable to this unwind e.g. Transurban (TCL), Sydney Airports (SYD), AGL Energy (AGL) and the Real Estate Sector, all of whom underperformed yesterday.
Interest rates go up in a reflationary environment, an investment theme we currently like although the noticeable lack of inflation is certainly disappointing central banks at present. Importantly, where should we be invested in a rising interest rate / inflation environment:
1. Banks should improve if interest rates rally in a controlled manner – we already have 40% of the MM Growth Portfolio allocated accordingly, probably enough, although we may increase slightly with an additional 2.5% into NAB the current standout.
2. Resources should benefit from this theme and we arelikely to be buyers of any further decent weakness.
3. The greatest “value add” is probably to simply avoid stocks that will be in the firing line of rising interest rates i.e. the bond proxies / “yield play” stocks.
We believe overseas investors have been / are pulling money from our shores, which ties in with the aggressive selling in the futures market. Considering how long interest rates have been low, it’s likely this will not be over in just a few days, but considering we are sitting on over 20% cash, this is music to our ears at MM. We still see the ASX200 falling towards 5500 over the coming weeks i.e. only ~2.5% lower.
Today we are going to update subscribers on parts of our “Shopping List” following the recent weakness in local stocks.
ASX200 Weekly Chart
Global Indices
US Stocks
US equities slipped last night, generating excellent risk / reward sell signals primarily in the tech. NASDAQ. It feels to us like a sharp 200-point down day for the Dow is approaching fast.
Overall there is no change to our short-term outlook for US stocks where we are still targeting a ~6-7% correction for the NASDAQ.
US NASDAQ Weekly Chart
Emerging Markets
The Emerging Markets Index has been on a stellar run since 2016, very similar to our highly correlated resources sector. However, a 5% correction now feels overdue, we will be watching this index as a potential indicator for the direction of stocks like BHP and RIO.
Emerging Markets (EEM.US) Monthly Chart
Shopping List
Resources
Iron Ore has corrected 17.5% in just a few weeks and suddenly the press is talking about a bear market, Fortescue not surprisingly has plummeted almost 15%. We liquidated our exposure to the resources sectors into the strength earlier this month. The levels where we currently see value emerging and are likely to commence accumulating are:
BHP under $25.50, RIO under $64 and OZL under $7.50. We also still like AWC as a business but no weakness has yet unfolded.
BHP Billiton (BHP) Weekly Chart
RIO Tinto (RIO) Weekly Chart
Golds
We remain keen to buy gold stocks into a pullback but the seasonality for gold shows very pronounced weakness usually unfolds into December, hence there is no hurry.
Gold ETF (GDX) Seasonality Chart
Banks
We are happy with our exposure, but may consider adding 2.5% to our NAB holding ~$30.70.
Financials
No change, we are still to start accumulating Challenger (CGF) under $12.
Challenger (CGF) Monthly Chart
Telco’s
While Telstra (TLS) has clearly been a “yield play” in the past today we see it more as a recovery story hence we will still follow our plan to buy arguably the markets most unpopular stock into weakness between $3.45 and $3.50.
Telstra (TLS) Daily Chart
Consumer Services
We remain keen on Aristocrat (ALL) under $20 where it touched for just a few seconds yesterday.
Aristocrat Leisure (ALL) Weekly Chart
Conclusion (s)
We are in “Buy Mode” having moved to ~20% cash within both the MM Growth Portfolio / Income Portfolio into recent market / sector strength. Obviously, the above target levels maybe tweaked depending on market conditions but they a great guide for now, also we may accumulate / scale into weakness if we believe it may have further to unfold.
*Watch for alerts*
Overnight Market Matters Wrap
· The US equity indices sold off overnight as investors reduce their risk exposure after digesting further on comments from the US Fed overnight with its anticipation of a rampant tapering program underway.
· Iron Ore lost 5.11% overnight (-17% in the 4 weeks), attributed to potential tightening in US monetary policy and Chinese efforts to reduce pollution. However, BHP is expected to outperform the broader market after rallying an equivalent of 1.18% in the US from Australia’s previous close.
· The December SPI Futures is indicating the ASX 200 to open 14 points higher, towards the 5675 level this morning.
Disclosure
Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday.
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