Market Matters Weekend Report Sunday 1st December 2019
Market Matters Weekend Report Sunday 1st December 2019
The ASX200 made new all-time highs last week spurred on by very dovish words from both the RBA and Westpac’s influential Head Economist Bill Evans – it now appears that Australian Official Interest Rates are heading down to 0.25%. We closed last week up +136-points / 2%, a particularly impressive performance considering our influential Banking Sector remains on the nose e.g. Westpac (WBC) and National Australia Bank (NAB) both closed down over 1% while the Bank of Queensland (BOQ) plunged well over 9%.
Today felt an opportune time to stand back and consider what might come next following the index milestone last week, the most uncomfortable trade still remains going long “boots and all” hence it may well be the best option. Since the ASX200’s last major swing low in December 2016 the markets experienced 4 decent corrections of 559, 426, 963 and 479-points respectively. On the first 3 occasions when we subsequently broke back out on the upside the ASX200 rallied an average of over 400-points before turning lower, with the smallest rally being 223-points. One simple very important point jumps out at us from these numbers:
If the market remains in the same mode the ASX200 should at least hit 7000 before a correction is likely.
Local stocks have already rallied over +27% from last year’s panic December low, only 2009 has performed better in the last decade and it had the benefit of the springboard effect from the huge GFC panic low, then it advanced over 50%! A few more percent up towards 7000 is nothing, a few days bounce by the banks would probably get us there on its own.
MM is technically bullish the ASX200 while it remains above 6800.
As we touched on earlier last week’s ASX200 strength was not reflected locally across all sectors while on the international level Emerging Markets continued to struggle as Hong Kong led the declines as civil unrest continues to cause concerns. This time last year stocks were plunging led by some of the most successful names of 2019, a fascinating year is coming to an end but what matters is where 2020 is likely to take us, hence this is where we remain focused today.
ASX200 Index Chart
The closely watched economist Bill Evans now expects the RBA to cut rates twice in the next 6-months, down from todays 0.75% to 0.25% plus he anticipates quantitative easing (QE) to commence in the second half of 2020 – two huge tailwinds for equities moving forward. In our opinion one of the below 2 scenarios needs to unfold before equities will lose their strong bid tone:
1 – Markets lose confidence that central banks can avoid a recession with monetary policy & QE, plus of course we also have government fiscal stimulus lurking in the wings.
2 – Inflation raises its head after a decade long slumber, and we see the same central banks being forced to lift interest rates.
We have no doubt that one of these 2 will rattle markets moving forward but of course “when’ is the million-dollar question. Of course, it doesn’t have to be the actual conclusion of 1 or 2 but more the worry of the risk moving forward that turns equities lower.
NB We may be at all-time highs now but in the last 4-years we’ve had 4 decent pullbacks of 10, 7, 7, and 15% respectively i.e. an average 9.75% correction every year since the markets last major swing low in 2016. If you asked me for my “best guess” range for the ASX200 in 2020 it would be 7100 to 6400 BUT statistics tells us that would be a very tight range.
Australian 3-year Bonds v Official RBA Cash Rate Chart
In our opinion the 2 charts above & below remain very important as we move into 2020 and it certainly looks bad news for retirees living off their savings in term-deposits but potentially the perfect recipe to send stocks higher i.e. the insatiable and ever-increasing hunt for yield. However, it’s interesting to see that although the market is now anticipating the RBA will slash rates down to 0.25% local 3-year bond yields are still way above their low posted in April. Importantly equities are driven far more by bond yields than Official Rates.
1 – MM expects many Australian term deposits to dip below 1% in 2020.
2 – MM still expects an important low for bond yields in Q1 of 2020.
If we are correct and 3-year bonds yields will form a major low around 0.5% in Q1 of 2020 the below chart illustrates in no uncertain terms that if bonds top out (yields bottom) stocks will lose a major tailwind of the last 12-montths, and more than likely experience a correction but remember yields look poised to go lower first.
Australian 3-year Bonds v ASX200 Chart
US bond yields are not surprisingly following the same path as our own, similarly we still expect them to form fresh all-time lows before a significant bounce as illustrated below. This has the same ramifications for US stocks as our own.
MM is short-term bearish US bond yields.
US 30-year Bond Yield Chart
We continue to believe the economic and commodity cycle will turn up in 2020 around 6-months after the global rate cuts of 2019, this should be a net benefit for the more cyclical $A compared to the $US. Plus, just for good measure the short position indicates traders are very, very bearish the $A, a bullish indicator to us.
MM believes the $A is forming an important low, our target remains the 80c region.
If this proves correct many ASX stocks will lose the weak $A tailwind that has helped them outperform in 2019 but again perhaps not just yet.
The Australian Dollar ($A) Chart
The correlation between the Emerging Markets and “Dr Copper” has been almost perfect over recent years. We are bullish the Emerging Markets for a number of reasons from a topping $US to the likely end to US – China trade disruptions. The final piece of the puzzle for us is a resolution to the civil unrest in Hong Kong, however this is a situation which we can see potentially blowing up to create an excellent buying opportunity in the region and EM.
MM are looking to buy the Emerging Markets and more Resources.
Hang Seng Index Chart
As we mentioned last week the civil unrest in Hong Kong has led to a sharp decline in both its and to a lesser extent China’s index, not surprisingly this has led to some knock on weakness in the Emerging Markets Indices. We like having some flexibility in our portfolios to buy potential panic selling in the region e.g. the Hang Seng around 10% lower, a drop that would probably cause a knock on effect through financial markets which would satisfy our target area for bond yields.
MM would be very keen technical buyers of the Hang Seng ~24,000.
Hang Seng Index Chart
Global equity markets continue to see investors drive up the price / valuation of large cap in vogue stocks but much of the broader market is currently been overlooked, this is perfectly illustrated by US indices – the Russell 2000 small cap index remains over 7% below its 2018 all-time high but the S&P500 is almost 7% above its similar milestone – that’s a huge outperformance by the likes of Apple (AAPL US) and Microsoft (US) over the smaller end of town.
History tells us major tops are formed during periods of optimism / euphoria, not when stocks are climbing a wall of worry like today. While the small cap US Russell 2000 remains, range bound the perfect technical picture before an ideal selling opportunity would be a failed rally towards 1800 i.e. ~10% higher. We wouldn’t be surprised to see the small caps outperform in the coming weeks / months as fund managers search for value.
US Russell 2000 Index Chart
1 – The MM Growth Portfolio
Again no changes last week with our cash level remaining at 13.0% – https://www.marketmatters.com.au/new-portfolio-csv/
Following our opinion that bond yields have further to fall before finding a bottom we are being patient with regard to increasing our cyclical exposure, but it remains our intention to be long value over defensives through 2020.
A mixed week for our Growth Portfolio with strong performances from relatively new purchases NRW Holdings (NWH), Pendal Group (PDL) and Boral (BLD) while Western Areas (WSA) and Emeco (EHL) dragged the chain. At this stage we have a few stocks we are watching closely but none that look in imminent danger of being sold. Hence today’s more about what we are looking to buy / add to:
1 – Western Areas (WSA) $2.78 – we have been looking for weakness to increase our exposure to this nickel producer and it presented itself very quickly – we are looking to average as planned ~$2.70, around a 20% correction.
Western Areas (WSA) Chart
2 – Computershare (CPU) $17.73 – we have talked about CPU over recent weeks and its looking better by the day.
MM is bullish CPU with stops below $16.30, or 6% risk.
Computershare (CPU) Chart
3 – Cleanaway Waste (CWY) $2.12 – Waste Management businesses Cleanaway (CWY) and Bingo (BIN) have been volatile in 2018 /9 almost taking it in turns to come in and out of favour – we’ve looked at their relationship closer in chart of the week.
CWY was smacked in no uncertain terms in October as the market was clearly disappointed with the news from their AGM – basically no growth in the first half of FY20 although they are optimistic for the 2nd half. However, we see improvements moving forward from their acquisition of SKM recycling while the sustainable waste management space makes plenty of sense considering the global environmental direction (bar the US unfortunately).
MM likes CWY moving into 2020, a challenge of $3 would not surprise.
Cleanaway Waste (CWY) Chart
2 MM Income Portfolio
Also no change with this portfolio, our cash level remains at 4.5% : https://www.marketmatters.com.au/new-income-portfolio-csv/
However as we explained in the Income Report on Wednesday we are adding the AMP Hybrid to the portfolio: https://www.marketmatters.com.au/blog/post/why-were-adding-the-new-amp-hybrid-to-the-income-portfolio/
For those of you who understandably switched off at the name AMP I urge you to read the above link, the hybrid offers an attractive yield for a business with a strong capital base.
Overall the last 2 weeks have been tough for both our Platinum & Income Portfolios because we own the banks, with the exception of Commonwealth Ban (CBA) they all seem to be doing their best to disappoint investors, it’s been a tough ride at times in the sector but we do believe they go higher into 2020 so its deep breath time.
AMP Ltd (AMP) Chart
3 – International Equites Portfolio
Last week we added Alibaba (BABA) and Wells Fargo (WFC) to our International Equities Portfolio as planned taking our cash position down to 37% : https://www.marketmatters.com.au/new-international-portfolio/
We now feel that there are only 2 ingredients missing / or need increasing within our International Portfolio, if bond yields are poised to make fresh all-time lows there’s no hurry to press most buy buttons. Firstly, is some extra resources exposure and secondly further exposure to the Emerging Markets.
1 – Copper stocks are set to open lower next week as the industrial metal fell slightly on Friday, while we feel interest rates are close to a bottom, we particularly like Australian company OZ Minerals (OZL), a stock which already resides in our Growth Portfolio.
MM is bullish OZ Minerals (OZL) into current weakness.
OZ Minerals (OZL) Chart
Last week we increased our exposure to the Emerging markets via e-commerce giant Alibaba (BABA) but were looking for other opportunities within the region and Chinese e-commerce goliath Tencent, following its 30% correction, feels perfect.
MM is bullish Tencent (700 HK) at current levels.
Tencent (700 HK) Chart
Conclusion
MM is bullish OZ Minerals (OZL), and Tencent (700 HK) as discussed above.
4 – MM Global Macro ETF Portfolio
No change to this portfolio, our cash position remains at 51.5% : https://www.marketmatters.com.au/new-global-portfolio/
We expect to be very active within this portfolio if / when bond yields make fresh lows but until then its slowly as she’s goes.
As we’ve discussed recently our favourite view moving forward is to buy the British Pound, we feel Boris Johnson will win the election and BREXIT will finally get sorted, surely common sense will finally prevail. It’s just a matter of timing, the current consolidation is feeling perfect.
MM is bullish the Pound at current levels – the like the ETF will like to “play” this view is the Invesco British Pound Sterling Trust (FXB US): https://etfdb.com/etf/FXB/
British Pound (GBP) Vs $US Chart
Conclusion
No change, MM likes the British Pound into current mild weakness.
Chart of the week.
Cleanaway Waste (CWY) and Bingo Industries (BIN) have been on many investors radar over recent years as waste management rapidly becomes a more important issue for the planet – just like an ageing population that won’t go away in our opinion.
After recent AGM’s we believe the elastic band has become too stretched towards BIN hence we prefer CWY for sector exposure at today’s prices.
MM prefers CWY over BIN at current levels.
Cleanaway Waste (CWY) v Bingo Industries (BIN) Chart
Investment of the week.
IVC has experienced a tough couple of years as competition has eaten into its margins but the largest funeral operator in Australia and NZ still enjoys the tailwind of an ageing and growing population.
Overall after the recent hiccup in the share price we see value emerging plus a 4% grossed up yield is not to be sniffed at.
MM likes IVC around $13.
InvoCare (IVC) Chart
Trade of the week.
Oil and Gas Engineering Group WOR is looking interesting after a quiet year, it looks ready to take off with less than 4% risk – attractive in our opinion.
MM likes WOR with stops below $14.50.
Worley Parson (WOR) Chart
Our Holdings
Our positions as of Friday. All past activity can also be viewed on the website through this link.
Weekend Chart Pack
The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.
Have a great day!
James & the Market Matters Team
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, or after the session when positions are traded.
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