Questions from subscribers – Positioning & dive into resources
**This is an extract from the Market Matters Morning Report from 12 August. Subscribers have the opportunity to ask questions of the Market Matters team throughout the week. Click here to get access to the full report and more
Question 1
“Question for the weekly report: Hi, I am a new subscriber and find the educational value of your reports fantastic. I have 2 questions: 1) The first is a question about positioning for a correction. Don't defensive stocks just depreciate less than market in a correction (for example Telstra in December) while counter cyclic strategies appreciate (for example gold and short equity positions). If this is fundamentally correct what other products or stocks appreciate during a correction? 2) Can you comment on your reasons for being long the $AUD? If you are predicting economic slowdown (or trade war) doesn't that usually negatively impact our resource sector and therefore currency?” – Guy P.
Morning Guy,
A great question (s) which obviously we will tackle in 2 halves, our thoughts on the $A has certainly garnered some attention, both previously and today.
Our flagship Growth Portfolio can be best described as stated on our website : “This is an ‘absolute return’ approach, will go to high levels of cash if warranted and can benefit from market downturns by investing in funds that inversely track the market.”.
Hence holding a portfolio that falls say 5% when the markets tumbles 20% is still not particularly exciting for MM, unlike how it would be for many. We are prepared to adopt a 50% cash position as we did in 2015 plus buy aggressive facing negative ETF’s as we did in Q4 of 2018, obviously if and when we become convinced the pullback is going to become more sinister than what we have witnessed to-date.
Hence how we position ourselves will depend on whether we believe the current choppy decline will evolve into a something closer to the three pullbacks around 1000-points post the GFC. However if we do become far more defensive we will keep our approach simple (KISS):
1 – High cash levels awaiting exciting opportunities which inevitably present themselves.
2 – Negative facing ETF’s but remember these slowly lose $$ if nothing happens making timing important.
3 – Gold, no change here we like gold in this low interest rate environment but it feels stretched around $US1500/oz.
4 – Defensive style stocks that pay a sustainable yield, they should outperform and combined with the above mosaic theoretically generate some positive returns even in a shaky time.
One of the most underestimated parts of the above is piece of mind, we often say invest to sleep but in this case if an investor has been positioned in a comfortable manner it will be far easier to step up and buy a falling market when others are running for the hills e.g. stocks looked pretty sick back in 2011, 2016 and late 2018.
MM is short-term bearish the ASX200.
ASX200 Chart
Correlations come and go and although the Aussie dollar is largely regarded as an economic barometer I would question then how come its depreciated so badly over the last 8-years when post GFC economic expansion has largely been solid – copper is over 30% above its 2015 panic low but the $A remains close to fresh decade lows.
Fundamentally there are a number of moving parts with interest rate differentials a huge influence – perhaps the US will start slashing rates back towards zero and / or President Trump will follow through on his threat to devalue the $US. We called the $A below 70c a few years ago but now it’s arrived we believe it’s time to look ahead, perhaps it’s almost too obvious that’s it going lower if global trade slows.
MM is bullish the $A targeting 80c in the next few years.
Australian Dollar ($A) Chart
Question 2
“While I agree that RIO is a good buy cum div now my question is – will it hold the price going forward as the signs are not so rosy IMO. Please correct me if I am wrong as I too would like to buy RIO before 8/8/19.” - Regards, Phillip W.
Hi Phillip,
I agree that RIO feels heavy at present but it’s already down 15% from its 2019 high, although that’s not an aggressive correction considering that iron ore has fallen closer to 24% – note we have taken its recent dividend into account with these numbers.
We felt the correction in iron ore was inevitable hence we had no position until recently i.e. we have bought the panic sell-off now let’s see how good our timing has been. The iron stocks of BHP, RIO and Fortescue (FMG) has been a very crowded /popular space so the current shake-up is understandable however how far through the washout cycle we are is harder to pinpoint. We believe the sector has more good years ahead of it with large cash dividends / capital management although the cycle is maturing taking stock volatility higher.
MM likes RIO at current levels.
RIO Tinto (RIO) Chart
Iron Ore Chart
Question 3
“Hi, Fortescue Metals (FMG) what are ur thoughts on that” – Tim W.
Morning Tim,
Fortescue (FMG) is in a similar position to RIO but on steroids! FMG has corrected 31% to-date, almost dancing the tango with the iron ore price. Only last week Twiggy Forrest implied more special dividends / buybacks are still on the menu for this bulk commodity producer, with an Est P/E for 2019 well below 10x and a yield around 6% fully franked MM believes when you look through the fog of panic selling the value remains solid, especially below $7.
MM is bullish FMG at current levels.
Fortescue Metals (FMG) Chart
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