So far in May the ASX200 has maintained both Aprils underlying strength and its polarization of gains with the banks and resources powering ahead while growth stocks and in particular the IT Sector remaining under the proverbial pump. With the local index heavily weighted in favour of the value stocks we feel it’s unlikely that the underlying index can meaningfully surrender much of the last 6-months gains until on the macro level investors believe that bond yields have peaked and / or the $US bottomed hence they remain key areas of focus for MM.
As we pointed out on Saturday even though the index rallied last week less than 45% of stocks closed in positive territory which historically raises a technical warning signal for the bulls. With global indices continually nudging all-time highs we prefer to adopt a conservative stance to equities as opposed to an outright bearish view – remember MM had basically been fully exposed to stocks for over 12-months and its only in recent weeks that we’ve started migrating down the risk curve hoping / planning to pick up some bargains into a seasonal pullback for risk assets.
COVID remains the one major wild card that could derail stocks, and while it’s the good news that’s being embraced at present, some further negative news trickling through over the weekend it will again be interesting to see if the bulls take note in the coming sessions:
- Scott Morrison warned on Sunday that Australia’s international borders could remain closed indefinitely as much of the world continues to struggle with the pandemic – with the exception of tourism I can imagine most people nodding silently in agreement after witnessing 2nd & 3rd lockdowns in the likes of London and Tokyo plus of course Sydney starts another week of restrictions this morning.
- India has now recorded 1.2million cases in just 3-days and already 240,000 people are incomprehensibly dead as the pandemic starts to inevitably spread through other parts of Asia.
- The Singapore stock market is Asia’s 2nd best performing index this year but it’s been stuttering since early April as the number of local infections has doubled leading to the reintroduction of social distancing rules.
Conversely US infections are easing and the UK overnight death toll was just 2 people, it’s likely equities will initially focus on the better news coming out of these economic power houses. None of this information tell us to sell and runaway but it does form part of our logic that having reasonable cash levels makes sense in today’s optimistic environment.
MM remains content not to chase current strength in equities
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