Winter is coming, both seasonally and in the market, and we are now MAXIMUM CASH in our recommended portfolios.
This doesn’t mean we only hold cash, far from it.
But it does mean, our allocation to cash is now at its peak because we believe opportunities to deploy this cash in the months to come will be far more attractive than they are today and we wish to be well positioned for this outcome.
The trade discussions further deteriorated last week, with no outcome, no immediate talks scheduled and markets awaiting China’s retaliatory response to the U.S which we ought to get early this week.
Meanwhile commentators continue to talk about what ‘could happen IF the trade war escalates’.
It’s happening now!
Last week the talks ended without agreement or plans for the next discussion, and some suggestion Presidents Xi and Trump might speak on the sidelines of the G-20 in Japan on the 28th and 29th June.
That is 6 weeks away, and in that time we will have seen tariffs on US$200bn+ of Chinese goods to the U.S raised from 10% to 25%, a guaranteed escalation of tariffs from the Chinese side, and if Trump is to stick to his word, the prospect of the U.S applying to tariff ALL US$525bn+ of Chinese imports into the U.S.
If that isn’t an escalation, then I’m unsure what is.
There is also a creeping belief in my head that an early ‘trade war’ is a good thing for Trump’s re-election prospects, since by bringing forward the economic pain to 2019, he stands well positioned to ‘negotiate an outcome’ late in 2019 that sets in place an inventory re-stock and rebounding economic environment into the U.S Presidential election in November 2020.
So for now, we remain particularly cautious and conservative.
Federal Election in a week
Curiously, the Australian market is outperforming the weakness being felt across the Asian region and in the United States, under the slightly misguided view of it being more defensively positioned against the rise of tariffs.
In one sense this is true, but the argument fails to acknowledge the likelihood of a Federal Labor Government this time next week, and the likely diminution of value that will ensue for owners of Australian equity and property values.
It was suggested that by well-regarded fixed-income managed Realm last week, that SMSF’s and households together owned a shade over $450bn of Australian shares as at the end of last year or just under 30% of the ASX by value.
The split was broadly 50:50 meaning SMSF’s held a shade over $230bn in Australian shares, and according to the report which cited APRA research from 2016, approximately half of all SMSF’s are in pension phase and able to take full advantage of franking credit rebates.
Simply put, there will be significant leakage of Australian blue-chip shares in the weeks and months following this weekends election, should Labor win power, that will overhang the Australian equity market.
The lack of selling this week is the calm before the storm.
RBA didn’t cut rates, but soon will
Last week the RBA unsurprisingly left rates on HOLD but did downgrade their forecast for financial year 2019 GDP growth to 1.75% – a number that would be the lowest annual growth in a decade.
We will get April employment figures this Thursday and it is quite possible we see a significant deterioration in the employment climate in these figures, or at worst, the May release next month.
Either way, the RBA will be cutting rates at some point in the coming few months in response to the slowing economy, and it is my expectation that they move in July and by 0.50%, so as to make as significant an impact into future expectations as possible.
Whatever the outcome, the rate cut is unlikely to do much other than stabilize the recent weakness, and we should be expectant of a soft end to 2019 before recovery in 2020.
SEEK (SEK) – taking profits
This morning we published our SELL note in SEK, taking advantage of a recent bout of share price strength to jettison one of our key growth holdings after 2 years in portfolios and around +20% outperformance against the ASX200 benchmark.
Our concerns around the deteriorating employment market in Australia leave us with little choice other than to SELL the stock at these levels, particularly since the group still derive nearly 60% of their cashflows and value from their mature Australian jobs business.
We worry that SEK will be forced to lower analyst expectations at the full year results in July/August in response to the weaker market for jobs.
VGI Partners (VG1) – an elegant means by which to raise capital
Whilst rarely do we like being forced to unexpectedly contribute more money into a stock or fund we hold, it’s a credit to the partners of VG1 that they have managed to structure their recently announced raising in such a way as to ensure existing holders retain the vast majority of value latent in the raising.
As a recap, VG1 is a global long/short equity fund we hold in our recommended International equity portfolio of funds and has been a consistent outperformer since we flagged it to clients in August 2017 at the IPO price of $2.00.
This morning the shares trade at $2.54 after having announced a 1 for 3.22 renounceable rights issue to raise $202m but linked to these rights is the attractive potential to invest $1 for every $4 invested in the rights issue, in the new listing of VGI Partners funds management business on a very attractive valuation.
The only investors with access to the new VGI Partners’ IPO will be those investing in the VG1 entitlement offer.
We will follow up with a note for clients later this week, but we feel good about the news.
Profit Warnings beginning – Reliance Worldwide (RWC) and Adelaide Brighton (ABC) notable
ABC warned the previous week and is also -20% on where it was a fortnight ago.
We think there will be more to come, but we hold out high hopes and expectations that the coming shake-out to markets and the local economy provide us with excellent opportunity to snap up some great quality businesses at more attractive multiples.
RWC would be one such business, but at today’s level of $4.00 we still feel like there is significant further downside to come before value emerges.
There are at least 3-4 other names we have high hopes to be buying during the middle of 2019, and feel very excited by the prospect of snagging a few bargains with our extensive cash holdings.
Telstra (TLS) outperforming as mobile competition subsides
We are thrilled to see TLS now back at $3.45 with investors encouraged by the likely absence of competitive pressures in the domestic mobile market so long as Vodafone and TPG (TPM) are occupied by their fight to see their merger approved by the ACCC.
We think TLS is in a great position to continue outperforming, assisted by the initial ACCC judgement to block the merger and the prospect of falling NBN connection fees under a Labor Government.
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