So much to cover, and yet it’s so important to sort the important stuff from the noise.
But, some context first.
As of now, the ASX200 is down -8% from its highs, -5% on the week and -3% for the year.
Technically, the ASX200 is now as oversold as it has been in 5 years or more.
In the U.S, the S&P500 is down -7% from its highs, -5.5% on the week, but still +1.5% on the year and +11% when currency is normalized for Australian investors.
Chinese equities are at 2-year lows.
Commonwealth Bank (CBA) reached a 5-year low this week and a 7-year relative low to the ASX200.
What’s our take?
This isn’t the big one, nor is it the start of a mass-panic, but I do feel confident that we have likely seen the high in U.S and Australian equity markets for the near future.
Markets are now in that transition period from a bull-market, but to what, I’m still as yet unclear.
Undoubtedly, the major post-Trump election rally trends are now breaking, and as I flagged last week, there is major regime change emerging in the eyes of investors insofar as the status quo on each of long-term bond yields, wage inflation and corporate profit margins.
U.S small-cap indices, the transport index, the wider S&P500 index, major Asian indices such as Taiwan, Korea and China, have all broken long-term uptrends in recent days, weeks and months, as to has the U.S 10-year bond yield.
This sell-off is a ‘de-risk’ or ‘de-compress’ that comes about in large part on account of the aforementioned issues, with higher bond yields probably top of the list simply because higher yields make every other asset class look relatively more expensive.
The corporate earnings outlook is an emerging concern of mine, and relates to the input cost pressures building from the tight labor market, tariff imposition and higher energy costs, but also due to concerns I think we all should have about 2019 growth should the Republicans lose control of Congress at the November 6th mid-term elections in the U.S.
As we have flagged on many occasion in 2018, the risks have been building up.
But with U.S economic growth still extremely strong and Chinese authorities busily pulling on their many monetary levers to avert the impact of a tariff-induced slow-down, it feels too soon to be calling for an ‘all out’ mass exodus from global equity markets.
We see the current conditions as being much the same as year-to-date, where investors ought to be increasingly discerning in how they compose their portfolios, and for additional cash to be held for a rainy day.
We are late in the U.S economic cycle, cost-pressures are rising, global monetary conditions are tightening and there is more than enough financial leverage and political uncertainty around much of the world to ensure that it doesn’t take much for conditions to spontaneously worsen.
However, predicting that, and its timing, is a mugs game, so for now we are preferring to hold more cash and to allocate in the investment classes where we do have market-exposures to those stocks, funds and assets that appropriately reflect our best relative risk-adjusted returns.
To re-cap our key views
- Overweight cash (10% in a balanced portfolio)
- Underweight fixed-income exposure due to concerns over U.S bond yields
- Overweight floating rate exposures – corporate loans, mortgage funds etc
- Overweight international equities relative to domestic Australian equities
- Underweight Australian Dollar exposures
- Australia is in the midst of a slow-rolling credit crunch (for more see below) and a corporate capital expenditure hiatus ahead of next year’s 2019 Federal Election
- We are Underweight Equity and Bond ‘Index’ exposure > by this we mean we have upped our ACTIVE component of portfolio composition to reflect our view that good discretionary managers should outperform their benchmarks in this environment
What are we doing in response to the sell-off?
We are selectively buying.
Many stocks look interesting and far from overvalued relative to their earnings outlook locally.
We have been cautious since April, so we have had cash on hand to spend.
In our international exposures we chose to add to our Platinum Asia fund holding from cash. We already feel like we are conservatively positioned in the international holdings we have, with the likes of Magellan, Antipodes, VGI Partners and Orbis in particular all holding excess cash or operating relative or value-oriented strategies that should outperform in a world of waning stock-market momentum.
Adding to Platinum Asia seemed a sensible risk-reward for us after its significant underperformance and the heavy policy stimulus coming out of China at present.
On the local side, we added to Afterpay (APT) at $14.50 precisely as we said we would a month ago. It is such a volatile stock that investors need to be prepared to take advantage of the volatility when presented.
Whilst we don’t know where the stock will bottom, from $14.50 down we feel very comfortable in the valuation and would again happily buy more shares lower should that play out.
We recommended Nufarm (NUF) under $6.00 as well and feel like investors are now getting great bang for their buck in a business at a cyclical low point but with a repaired balance sheet and the blue-sky earnings potential from their first mover advantage in omega-3 enhanced canola.
Beyond these shares, the likes of BWX (BWX), Magellan Financial (MFG), IOOF (IFL) and AMCOR (AMC) all look outstanding value at current levels. In fact, AMCOR (AMC) is now a table-thumping buy, trading at a 5-year valuation low-point despite easing cost pressures associated with the -20% fall in U.S polyethylene prices.
Fast facts from the week – home lending
Australia’s credit crunch is now in full effect.
August home lending fell by -10% annually, which is the worst result since 2010.
Reflecting the tightening credit, major listed real estate website Domain (DHG) today warned on profits due to collapsing listing volumes. September quarter listings in Sydney are down -8% and auction volumes are -22% on last year. In Melbourne, new listings are -1% and auction volumes are down -18% annually.
Each of DHG, its parent company Fairfax (FXJ) and its merger partner Nine Entertainment (NEC) are down -12 to -13% today on the news.
If anyone thinks the worst is over in housing, take a Panadol and lie down.
A huge thank you
Last but not least, a massive thank you to all of those in Melbourne that attended our investment presentation at the Jam Factory on Tuesday night. It was the biggest client night we have ever done with over 150 attendees.
We hope you got a lot out of it.
Sincerest thanks to our speakers Tom King (Nanuk New World Fund), Andrew Lockhart (MCP Master Income Trust) and Gary Rollo (MHOR Small Companies Fund) for their enlightened and entertaining views.
As we said on the night and in formal recommendations pieces historically, we believe these funds will provide investors high quality exposures to their respective asset classes and we would encourage you to give them your fullest consideration.
For those of you that missed the night, please call in and talk to your advisor as to what you might have missed
Jono, Guy and Jordan
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Australian Market Index
Thursday 5pm Values
|S&P / ASX 200||5884||-292||-4.7%|
|Property Trust Index||1382||-21||-1.5%|
Key Dates: Australian Companies
|Mon 15th October||N/A|
|Tue 16th October||Div Pay Date – Vanguard funds|
|Wed 17th October||AGM – CSL (CSL), Origin (ORG), Tabcorp (TAH)
|Thu 18th October||AGM – Ansell (ANN)
|Fri 19th October||N/A|
International Market Index
Thursday Closing Values
|U.S. S&P 500||2728||-174||-6.0%|
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