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Friday, 11 August 2017
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Sector by Sector

THE AUSTRALIAN MARKET

This is the ASX 200 chart on a daily basis. We have been stuck in this really rather remarkably tight range between 5850 and 5650. The market is not trending which is making it a touch more difficult for investors and traders. You’d better pick the right stock because the market is going nowhere. The first break of the upper or lower boundary will doubtless see everyone pile in to perpetuate the break.

BAD RESULTS SEASON

Our results season has started. So far 41 companies in the ASX 200 have reported and only nine of those are up since the results (a falling market doesn't help). The average share price move since results has been -3.64% which is quite honestly, abysmal. Six companies have dropped more than 10% and 16 have dropped more than 5%.

The mid-cap sector takes no prisoners during results and on the back of the performance so far from the results season you would do well to identify when any mid small cap companies you hold have results and think about getting out before they report. The prevalence of algorithm trading, which exaggerates any volatility in the short term, and the regime of continuous disclosure mean some companies haven’t spoken to the market six months, making this a very dangerous period of the year. We thought last February’s results season was bad with 51% of the two hundred and sixty odd major results moving more than 3% on the day of their results, 35% moving more than 5% and 11% moving by 10%. This results season is worse so far. Before rigourous continuous disclosure requirements companies would feed changing expectations into the market through select brokers and it would 'seep' in, not crash in. No more.

The bottom line is that August is a period of risk, especially in mid-caps, although the large caps are not immune (CWN and TAH just fell 10% on results). So rather than take the risk before results the strategy for the conservative investor is take no risk on results but the moment the company has announced results, and de-risked itself for the next 3-6 months, you can buy. The game is “buy the rises” and “sell the dips”.

We have been reducing weightings in mid-cap companies ahead of results but will be prepared to raise them again afterwards.

BUY IN JULY

July is historically one of the best months of the year (average rise in July is 2.9% over the last ten years) but this year we registered the worst July in six years. July is typically a good month because lots of individuals and companies make decisions at the end of June to put money into super and that money arrives in July and gets invested. July also follows tax loss selling in June when sold down stocks typically rebound.

Our best performing sector in July was the resources sector which dazzled on the back of a 9% rise in the oil price, an 18% rise in the iron ore price, a 7% rise in the coal price, a 7% rise in the copper price and a 9% rise in the nickel price. July was all about a commodities bounce.

The banks had a bit of a rally, up 2.3%, helped by the announcement of APRA’s capital requirements for domestic lending institutions which were a fair bit softer on the banks than it could have been. The sector was also getting over the introduction of the big bank levy in the budget and the Commonwealth Bank has just popped out a better than expected set of results which included no surprise capital raising to worry shareholders. Same with the NAB today. Solid result no disasters. The assumption is that the bank sector is now adequately capitalised and the major risk of equity issues has dissipated.

The period from the end of September to May is the best market run. This is the seasonal chart of the ASX 200 index since 1995 excluding the GFC in 2008. The white line is the average performance of the market during the year over 20 years and the orange line is the performance of the ASX 200 this year. This is clearly saying, if history is anything to go by (which it usually isn’t), that we should be buying the market for the next run up to May. Note the scale on the right which gives you an idea of the size of the moves. The “Sell in May” mantra for instance would save you just 2% on average, 4% this year so far. If you did it perfectly. Most of you wouldn’t get out of bed for 2% so are unlikely to bother timing the market on this seasonal habit.   

THE US MARKET

This is the S&P 500 index on a daily basis. The trend is still undeniably up. It was approaching an oversold level but, on the back of Fridays fall on the back of the Korean tension, the RSI has significantly dropped to 37, almost oversold. We have been saying there is no technical reason to call the top and that situation remains although with two ego driven nuclear powers going head-to-head we could easily see a drop to the bottom of the trading range which would involve a 5% fall. As we wrote this week, we had a client ring up yesterday asking to sell their equities and put it in bonds or fixed interest (hybrids actually). The golden rule of stockbroking is, when a client rings up, find out what they want and execute it as quickly as possible without your opinion getting in the way. At least you get a commission and the client takes the responsibility. And this is the reaction that this sort of issue will get. If you were sitting in a large mainstream super fund with the ability to press buttons from cash through to Conservative and aggressive, I’m sure a lot of people would be pressing cash at the moment. The risk of a catastrophic event (nuclear bombs, Greece going bust, the EU breaking up) is like dropping a fart in the market (apologies) – it does not go away for a while and it stinks things up. Completely understandable if you should want to leave the room until Korea clears up. And perhaps the more worrying issue in this case is that both Trump and North Korea have massive egos and when it comes to nuclear escalation it is perhaps the worst possible combination of leaders. On top of that the US market is not cheap at the moment, and this is a regularly quoted concern. The S&P 500 is trading at a PE of 22.7x compared to a long-term average of 16.5x. The chart below shows the S&P 500 P/E ratio (orange line) compared to the average (blue line) and the extremes (white lines) - the suggestion being that the PE is at its extremes at the moment. There is reason enough there, let alone from North Korea, to run up cash. What more excuse do you need?

https://www.marcustoday.com.au/webpages/images/report/20170811/pfmhwkfy9074818282661191697.jpg

Meanwhile the US results season is turning out a lot better than ours. 85% of the S&P 500 have now reported results and 73% of been above expectations. The usual outcome is 60 to 65% above expectations. Earnings growth forecasts for this results season in the US have risen from a percent of months ago to 12%.

This is the seasonal chart of the S&P 500. This tends to suggest that on average the US market goes sideways from July until the end of October before rallying again for the other nine months. You can’t read too much into this but if history repeats they are entering their statistically worst four months of the year and are running a bit ahead of the average so far this year. The white line is the seasonal average since 1983, the orange line is the S&P 500 so far this year. 

SECTOR BY SECTOR

Below are sector comments and tables of fundamentals and performance numbers of the stocks in each sector.

The way I would use these tables is from the top down:

  • Think about the drivers for each sector and the themes. I have tried to comment on that for some sectors but only where the sector has big drivers. Some sectors for instance are simply a collection of individual stocks grouped together by the ASX, but looking at ‘the sector’ is irrelevant. Instead you drill down to the stocks straight away.
  • Identify positive and negative sector themes, decide if the sector has good drivers and the ‘tide is running’ up not out. Some sectors have sentiment running against them (banks, retail). Just go through each sector and where the sector grouping is legitimate and represents a homogenous group decide “Yep” or “Nope”.
  • For those of you who have some respect for trend look at the performance numbers. You will quickly see stocks that have “blue” performance numbers across every time frame. These are clearly proven long term performers and the odds are that they will continue to be so.
  • Traders and investors, look at the performance figures and identify stocks with red numbers on the left in the short term and blue stocks in the other longer timeframes. These are potentially quality stocks presenting a buying opportunity.   

The basic idea is that you can scan the market by sector and then stock by stock. Maybe I’m the only one that likes things ordered in this way but hopefully over time we can revisit the debate on each sector and highlight the opportunities in the underlying stocks.

THE BANK SECTOR

This is the weekly chart of the bank sector - we have undeniably seen some sort of bottoming in the sector as the Budget hangover fades into the distance and after the US Treasury wrote a 150 page report which called for the Basel Committee to water-down their capital requirement guidelines which they described as constraining growth in the US economy. APRA has fed the rally with a soft set of capital requirements which don’t have to be hit by the banks until 2020 and were accompanied by a comment that the banks should be able to achieve the targets without any need for capital raising beyond the normal process of dividend reinvestment plans and hybrid issues. That has been pretty much confirmed by results from the CBA and NAB this week which have come in generally a bit better than expected with no major surprises (like a capital raising). The media continues to smash the banks turning the breach of AUSTRAC rules by the Commonwealth Bank into multiple front-page articles. But for now, technically at least, and fundamentally, it is steady as she goes and you might imagine the sector will outperform in a falling market.

Here is the seasonal chart of the Bank sector again. The white line is the average performance of the bank sector since 2000 day by day month by month. The orange line is this year. The sector usually peaks before the results and dividends in May as it did again this year. May and June and half of July are the worst months to be in the sector (apart from November) and on that basis we are now at the “Buy in July” moment for a run to the results run up to the end of October. This chart suggests that we have already had our annual correction this year. The obvious strategy is to try and catch the traditional run up to results and strip the dividend out of the CBA results with the start going ex dividend on Wednesday 16th.

The numbers on the sector:

The performance numbers:

RESOURCES

This is the chart of the resources sector on a daily basis. With the iron ore price bottoming and the oil price finding a little bit of form after a sharp drop, the sector looks as though it has broken the downtrend that’s been in place since February. No reason to be selling resources on the back of this chart.

The iron ore price recently bounced.

The numbers:

The performance:

ENERGY

The oil price has shown a bit of form since the OPEC/non-OPEC meeting on July 24.

 

The performance:

The numbers:

REITS

A sector that benefits from falling interest rates. They all went ex-dividend at the end of last month and have subsequently dropped in a hole as market interest rates rise. The sector is inversely correlated to the 10 year bond yield. When rates start going up (as they did in November last year), sell the sector.

This is the 10 year bond yield. There is an inverse correlation between REITs and rates. You will see the recent interest rate rise at the end of June which coincided almost exactly with the recent REIT sector drop. This is a low growth sector but it is also a fairly low risk sector and on the back of this most recent sharp drop, and the drifting interest rates since, income investors (rather than growth investors) might look at some of the bigger stocks for income. There is no franking on these dividends but there are a couple of 6% yields on offer. You would continue to avoid the retail REITs (WFD, SCG, SGP), it seems they are dropping into an Amazonian hole.

The performance:

The numbers:

INSURANCE

The performance:

The performance numbers:

UTILITIES

The sector has topped out along with other interest rate sensitive sectors and a few brokers have downgraded some of their recommendations. A rise in market interest rates is killing thee sector in the short term. The yields are a bit skinny and there is little to no franking. With low yields and low ROE you have to wonder what the interest is.  

The numbers:

The performance:

HEALTHCARE

This is a sector that has seen the big end perform and the small end disappoint. No income here. A lot of stocks that would benefit from a fall in the A$ that isn’t happening although logic suggests it should. What we should all be looking for is an opportunity to buy the quality stocks (CSL,RMD, COH) on weakness if possible. With the recent rise in the Aussie dollar there has been a bit of a sell-off but not sure you would categorise it as a great opportunity just yet. If the US passes the new health care bill (which is very touch and go) the sector may get a lift.

Performance: 

The numbers:

IT

Performance: 

The numbers:

TELECOMS

This sector chart is completely dominated by the Telstra market cap. So here’s a chart of Telstra. It’s still heading down not helped by a bit of research this week from Citi suggesting that they will cut their dividend at the results in August. It seems unlikely but the risk is too big, if Telstra does cut its dividend the share price will get smashed. We have a holding in our income SMA, bought during the recent dip, but now have to decide whether it is too “risky over results”. One thing I do know is that we won’t be trying to strip the dividend this time.

Performance: 

The numbers:

FINANCIALS EX BANKS

Performance: 

The numbers:

RURAL – FOOD – STAPLES

No point putting up a sector chart. It’s a stock by stock sector.

Performance: 

The numbers:

SERVICES COMPANIES

Again- no point putting up a sector chart. It’s a stock by stock sector.

Performance: 

The numbers:

GOLD

A trading sector depending on the Gold Price. NCM if you want to move in slow motion, NST is a favourite for the trader, but you can see from the performance numbers…they move pretty much as one in trend if not in magnitude of price movement.

Performance: 

The numbers:

CURRENCY AFFECTED STOCKS

This is the chart of the Australian dollar. With interest rates in the US heading up and with interest rates in Australia firmly on hold, probably until 2019 at least, you would imagine the Australian dollar should come off which means all these stocks should outperform. But it hasn’t happened. As we write in fact the A$ has just popped over 77c  again with brokers suggesting it’s on its way to 80c.

Performance: 

The numbers:

RETAIL

No chart available here – but you know the story at the moment. Amazon fear continues and the debate is whether it is overdone or not. It is a trading sector and we have been waiting for a bounce in JBH and HVN in order to have a trade and have recently bought JBH. Not sure we’d be looking to invest, so a trade will do.

Amazon fears are probably overdone, the next JBH results are likely to be good (unaffected by Amazon yet) and JBH put out earnings guidance (upgraded it) just a month ago. I think there’s money to be made from this sentiment hole although it is a cyclical ‘trading/timing’ sector not an investment sector. The structural issues for WES and WOW remain and WOW still, even now, looks expensive. There is some trading to be done in this beaten up sector.    

Performance: 

The numbers:

ONLINE CONSUMER

Performance: 

The numbers:

BIOTECHS

Performance: 

The numbers:

GAMBLING

Performance: 

The numbers:

MEDIA

Performance: 

The numbers:

TRANSPORT

Performance: 

The numbers:

MINING SERVICES

Performance: 

http://www.marcustoday.com.au/webpages/images/report/20170714/snodfmjl7900418108637514939.png

The numbers:

 

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