Is The Worst Behind Us?

FINALLY ITS FRIDAY Am I the only one losing track of time? I could only tell it was Friday because the dress code changed in our morning meeting. A few strategy points today: Wall St’s 400 point reversal on the Gilead (lack of efficacy) Chinese trial story in the Financial Times suggests to me that the market is still in a general uptrend. This little sell-off we’ve responded to may not be significant after all. The market has certainly tired, but there doesn’t seem to be a risk of an all out collapse again. The market is shrugging off dire headlines. Every economic release is a disaster and the market doesn’t mind. Overnight US New Home sales saw the biggest fall since 2013, 26.5m people unemployed in the US in five weeks, the most since the Great Depression, 4.43m in the last week, US PMI the lowest since 1998, UK PMI at 12.9 down from 36 and the worst estimate was 31. On top of that we are trading through the disastrous oil price headlines. Yet the market is not shocked and doesn’t collapse. This resilience is born out of a couple of things:
  • Prices are already discounting a lot.
  • COVID-19 is (despite the Super bear warnings) presumed defeated.
  • Government stimulus has arguably over-cooked it on misplaced paranoia.
  • The oil price has bottomed.
  • In the next month or two we are all going to be back in the office hearing stories about businesses being kick-started back into action.
  • In the next couple of months its going to be business as usual and any negative headline will be talking about the past whilst the future is much brighter.
So I’m not sure we’ve done the right thing cashing up again, although we’re not going to change it, we register the recurrent swell of buying that, whilst it is easily defeated on a daily basis, shows that a significant body of fund managers are seeing this as some sort of long term low rather than us being on the brink of a new economic disaster. It’s looking like a discounted economic disaster. We’re staying in 40% cash, the market’s in no rush to rally, the technical picture is still negative, there are no significant technical buy signals on markets or stocks today, the volatility is still very elevated and there is a lot of stock specific company ‘announcement risk’. But we should all note this underlying support, not worry too much and be prepared to get more positive. This is the ASX 200 chart – there is nothing on here that says BUY yet – quite the opposite, it says SELL still. But keep an open mind for the day that changes: LOCKDOWN PARTY I note overnight in the UK, amidst disastrous economic headlines, that Taylor Wimpey and Bovis (big housebuilders in the UK) jumped 9.4% and 11.5% on news that the UK housebuilding industry is going to get back to work. This tells me a couple of things. In the next couple of months we are going to be back to work, in traffic jams again, doing catch-up shopping, flooding the restaurants and bars, watching Top Gun 2 and the new James Bond film in the Cinema and having a host of overdue and catch-up house and office parties. Before this happens - sentiment will change towards the most hard-hit consumer-focused sectors. Whilst many of these stocks have taken deep damage, so have their share prices. Not today, but in the spirit of getting ahead of the headlines (we talked about it yesterday) rather than reacting to the headlines, we should probably identify the quality stocks that are still in sentiment holes in the following sectors:
  • Housing market
  • Leisure
  • Sport
  • Travel
  • Hospitality
  • Gambling
  • Bars and Restaurants
(Did I miss any? REITs, Infrastructure maybe) The moment is coming to take advantage of the negative sentiment and by the time you are making a speech at your end of financial year party in an expensive restaurant talking about how great it is to get back to work…it’ll be too late! Which stocks? I haven’t had time today but its not rocket science. Start building that watchlist now. Before you buy anything, wait for the trend to turn first (you don’t have to lead the market) and be very careful to check whether your chosen company has clarified their earnings and balance sheet damage yet, otherwise you take a big announcement risk. The safe way to do it is to buy on any positive announcements, you’ll miss the pop, but catch the resultant trend. We don’t get opportunities like this very often. This is not the time to play chicken until its obvious. This is not long term investment, it is exploiting the recovery in sentiment for a while. No rush, the market has recently peaked and is drifting, but get ready. BANK RESULTS As you know we have a neutral weighting in banks in our funds going into the results starting next week. The banks had a very good day earlier this week on that AFR article repeating the RBA comments that the banks have strong enough balance sheets to at least partially pay dividends. My guess, and it is a guess, which I can afford to take with neutral weightings, is that the risk is on the upside with these results. Yes they’ll have higher bad debt provisions, yes the outlook will be challenging, yes net interest margins (after the RBA slashed official rates) will be squeezed, yes they cannot inappropriately trumpet profits, but the sector is still down 40.6% from the recent high, against the ASX 200 down 27.5%, the sector is on a multi-decade low relative to the market and after these results dividends will return. No it is not a growth sector, no you would not buy it for growth, but let’s just see if these results can create a sentiment rally that is worth holding for and maybe even buying into if it materialises over the next couple of weeks..and if they pay dividends you can catch those as well. Best wait for the results before taking a view. Much lower risk that way.

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