Australian Investment Blog

The ASX200 has now experienced 2 similar days this week, initially rallying fairly strongly following strong leads from overseas indices only to struggle to hold on to the gains, on both days we’ve closed towards the lower end of the day’s range. Under the hood yesterday we had winners just nudging the losers, the fund managers caught my eye on the upside for a change with Magellan (MFG) +3.8%, Janus Henderson (JHG) +3.7% and Pendal Group (PDL) +3.45% all looking good while the gold and lithium stocks endured a bad day at the office.

MM and the market in general were correct in thinking the RBA had decided to watch the Melbourne Cup this year rather than cut rates again, a logical decision in our opinion, we feel they should wait and see how the current very accommodative 0.75% helps our economy get some traction in 2020. At this stage markets are leaning towards another cut in the next 6-months but its not priced as a foregone conclusion. Interestingly the $A has kicked fairly hard on the news testing multi-week highs even with the $US also edging higher, in other words the market remains negatively positioned towards the $A in our opinion.

MM remains neutral the ASX200 with another pullback towards 6600 feeling more likely by the day.

Overnight US stocks closed basically unchanged across the board however there was obvious sector rotation out of defence into offence. Gold down $25 while oil and copper were up, interest rate sensitive sectors like healthcare, utilities and real-estate down, while materials & financials traded higher.

Today we’ve continued to look for opportunities in the cyclical, emerging markets and resource stocks as our current “Buy cyclicals v defensives” view rapidly gains some traction.

ASX200 Chart

Westpac finds good buying

Unlike the index Westpac (WBC) commenced trading after its $2bn capital raising towards the low of the day before regaining over half of the losses to the end the day down only -2.55% - an excellent performance in our opinion closing at a premium of almost 8% above the to the raise price set at $25.32 . At this close Westpac is now yielding just under 6% fully franked, still not to be sniffed at with Term Deposits paying below 1.5%, unfranked although clearly that comes with higher risk.

Our institutional bids yesterday into the book were scaled back by 65% i.e. our wholesale / intuitional clients we got 35% of what we were after.

MM will be taking up the SPP in both the Platinum & Income Portfolios.

MM likes Westpac (WBC) around $26.

Westpac (WBC) Chart

As we touched on earlier the fund managers enjoyed a solid Tuesday with Pendal Group (PDL) the 3^rd best performer in the ASX200 yesterday rallying almost +3.5% ahead of their results today. We’ve already seen how stocks in the embattled sector can spring to life with BREXIT influenced Janus Henderson (JHG), which we hold in the MM Growth Portfolio, rallying +36% since August. We can see Sydney based global investment management business PDL recovering in a similar manner, lets see how the market likes its result today.

Technically MM is bullish PDL targeting the $9 area.

Pendal Group (PDL) Chart

The $US remains “toppy” & $A strong

The 2 charts below illustrates that the recent pullback in the $US remains only a blip compared to the last few years rally but we believe it’s a matter of time before markets fully embrace what we think is a major change in trend, the ramifications are likely to be significant for relative sector performance. At the very least the risk / reward for investors positioned for an ongoing rally in the $US is very unappealing to MM.

MM is bearish the $US which is by definition bullish the metals / miners.

The $US Index Chart

In line with our bearish view on the $US MM is bullish the $A ultimately targeting the 80c region i.e. overseas holidays get cheaper! However we believe it will become an increasing headwind for $US earners who have outperformed over recent years – no signs yet but a decent break above the psychological 70c and we believe it will catch some fund managers attention.

Australian Dollar ($A) Chart

The base metal prices are slowly but surely breaking their clear downtrend that’s been in play for 18-months, our initial upside target is ~10% higher which is likely to ignite the likes of OZ Minerals (OZL), its already rallied ~25% since early September and base metals are only getting up off the canvas, any upside momentum is still missing.

MM remains bullish the base metals and resource stocks.

Bloomberg Base Metals Index Chart

Bond yields continue to lead sector rotation

While we still believe it’s far too early to be talking about an end to the multi-decade bear market for interest rates we do believe they are reaching, or already have reached, the nadir of the descent. At MM our opinion remains central banks are going to implement aggressive fiscal stimulus in 2020 to maintain post GFC economic activity, a move that is both potentially inflationary and an acknowledgement that further rate cuts will be futile.

In the short-term we can see one final dip by US 10-year bond yields towards 1.4% but this is getting very close to attempting to interpret the day to day noise that reverberates through markets as news flows across our screens. As bond yields bounce / rally the greater the money appears to be flowing from the defensive stocks into the likes of the resources.

If we see bond yields make another low MM believes it’s an ideal opportunity to increase further our cyclical over growth / defensive stance.

US 10-year bond yield Chart

Our opinion remains firm that rotation is the main game in town, we’ve been discussing our view that it’s time to switch from defensives / growth to value moving into 2020 and an excellent leading indicator is supporting this view. This morning we saw a great example of this unfolding albeit in its infancy – at 6.30am the Dow was up 90-points led by the Financials which were up +0.8% but in the red corner we had defensives Healthcare -0.6%, Real Estate -1.8% and Utilities -0.7%

MM is bullish into Value over growth / defensives into 2020.

US S&P500 Value & Growth Indices Chart

Stock markets remain neutral / positive.

US stocks in particular continue to “climb a wall of worry” with very few news articles focusing on how cheap equities remain when compared to today’s interest rates, its hard to imagine a meaningful decline while fund manages are so cautious / bearish and the US-China continue to make progress on trade.

We don’t believe investors should fight the trend but because we can see and anticipate further large sector rotation the gains are likely to be missing aggressive upside momentum. However the Put / Call ratio and VIX Put / Call ratio and the Fear Index (VIX) have fallen to levels where a short-term pullback would not surprise.

MM can see grinding higher for many weeks between the support and resistance lines shown below.

US S&P500 Index Chart

International Equites Portfolio

Last week there were no changes to our International Portfolio with our cash position remaining at 48% : https://www.marketmatters.com.au/new-international-portfolio/

At this stage there are still 3 specific sectors where we would like to increase our exposure for the MM International Portfolio:

Resources

We obviously have BHP in the portfolio following last week’s purchase but we are keen to increase our exposure as this view continues to unfold as expected. This feels like a classic case of “keep it simple stupid” (KISS) we are very keen on OZ Minerals (OZL) which we hold in the Growth Portfolio, it’s our favourite addition to the International Portfolio – remember Australian stocks can be in an International Portfolio.

MM is bullish OZL and likes it for our International Portfolio.

OZ Minerals (OZL) Chart

We also like US listed Teck Resources (TECK US) which is a $US9.6bn mining business based in Vancouver - it has activities in zinc, copper, molybdenum, gold and metallurgical coal. The stock’s almost halved since early 2018 showing its leverage to global trade and base metal prices, the stock looks poised to pop to the upside and the risk / reward is attractive to MM at current levels.

MM is bullish TECK and likes it for our International Portfolio.

Teck Resources (TECK US) Chart

Banks

As subscribers know we are bullish the cyclical banking sector and this week we’ve seen the US KBW Banking Index breakout to fresh 2019 highs, a great example about how myopic we can become looking at just the ASX where over the last 5-days we’ve seen ANZ Bank (ANZ) -6.8%, Westpac (WBC) -5.4% and National Australia Bank (NAB) -4.3%.

We already have 10% exposure via Bank of America (BAC) and JP Morgan (JPM US) but we are targeting another 5% exposure – our preferred option today is Citigroup (C US).

MM is bullish the cyclical US banks into 2020.

US KBW Banking Index (BKX US) Chart

Citigroup (C US) Chart

Emerging Markets

MM continues to like the Emerging Markets moving into 2020, a view strongly supported by our bearish $US view.

Our preferred way to play this view adding to our Samsung (005930 KS) and Ping An (2318 HK) position plus internet and e-commerce goliath Alibaba (BABA US).

Emerging Markets ETF (IEM US) Chart

Alibaba (BABA US) Chart

Conclusion (s)

MM likes the resources, banks and emerging markets into 2020, we expect to increase our exposure to these areas over the next 24-48 hours.

Watch the pm reports for alerts.

MM Global Macro ETF Portfolio

Last week we didn’t change our MM Global Macro Portfolio leaving our cash level at 51.5%. : https://www.marketmatters.com.au/new-global-portfolio/

Our strongest 2 views at present are bullish the emerging markets and cyclical banks hence we are simply likely to increase our IEM and BNKS ETF positions.

We still hold our macro view around BREXIT and the UK election i.e. we remain positive hence our comfort in holding Janus Henderson (JHG) in both the Platinum and International Portfolios. Following the recent pullback as an election looms in just a few weeks we believe the road of uncertainty is almost over for the UK – good news in our opinion assuming Labor don’t win the election

Our preferred ETF to invest in the Pound is the Invesco ETF: https://www.invesco.com/portal/site/us/investors/etfs/product-detail?productId=FXB

British Pound vs USD Chart

Conclusion (s)

We are likely to implement these 3 ideas this week i.e. increase emerging markets and global banks’ exposure plus also buying the Pound.

A reminder that alerts for the international portfolios appear in the Afternoon Note with a notation in the subject line.

Overnight Market Matters Wrap

• The US equity markets closed pretty much unchanged overnight as it continues to hover around all-time highs as hopes of a trade deal continues to be the main subject on investors’ eyes.
• Dr Copper on the LME gained 1.16%, which is a leading indicator on global growth, along with crude oil, up 1.20% at US$57.22/bbl.
• BHP is expected to outperform the broader market yet again, after ending its US session up an equivalent of 1.74% from Australia’s previous close.
• The December SPI Futures is indicating the ASX 200 to open 16 points higher towards the 6715 level this morning.

Have a great day!

James & the Market Matters Team

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