1 March 2020
Firstly, let us get some of the stats out of the way before the Quant guys start jumping up and down!
USA 1. On the negative, 11 out of the last 12 “Tightening Cycles” led to a recession. 2. A positive – first time presidents with the result against them in mid-term elections, in nearly every occurrence the market has rallied for the next 9 months averaging double digit gains ! 3. The market fell in 2018 and almost never does it have consecutive negative years.
TRADE WAR In the early 1990’s the world was in a recession which coincided with the oft threatened US and Japan trade war. Another negative is the current Chinese and US trade war.
REAL ESTATE Foreign buyer bubbles! It has happened before! In the 1970’s the Japanese underpinned real estate values in Australia. Then when a recession hit at home in Japan, they sold out and repatriated the funds home.
Chinese buying of Australia and Canadian real estate may be a little different. This buying is from people who want to move capital out of China and it is unlikely to see that reverse, even if there was a recession in their homeland.
Interesting to note in the negativity with real estate at the moment, is the Canadian experience. Toronto versus Vancouver. One held steady while the other fell 20%. Then the one that fell (Toronto) turned around and started to go back up again.
In Australia we have had changes to lending practices as initiated by the Royal Commission and APRA. Interest only loans had to be curtailed.
The LVR’s had to come back to prudent levels.
HOWEVER, EVERYONE UNDERESTIMATES HOW MANY PEOPLE WANT TO COME AND LIVE HERE!
That underpins our real estate. We are still the Number 1 target destination for HNW immigrants. Real Estate needs to stabilize for the stock market to have a good year. Why, because asset classes follow suit. Remember the 1987 equity collapse? A few years later the real estate market followed suit.
BREXIT A storm in a tea cup. Really only affects the UK economy. The trade war has a far greater impact on global GDP growth than a small bushfire on the outskirts of Europe. The UK economy is 3.5% of the global economy
World Economic League Table, published annually by the Centre for Economics and Business Research, or CEBR, in London
The table tracks the size of economies over the next 15 years. It predicts that three of the top five global economies by 2033 will be Asian, with China in top position, India third and Japan fourth. The US will be second and Germany fifth.
Other Asian economies will rise during this period, with South Korea becoming the 10th-largest, Indonesia (12th), Thailand (21st), the Philippines (22nd), Bangladesh (24th) and Malaysia (25th), all making the top 25. Source – China Daily
So stick to Asia and avoid the rest of the world.
- China fell all through 2018
- Small caps have been belted. The retracement of the move up from low in 2016 to the high to the high in 2018, is now at 62%. FIBONACCI!
So why will the market rally this year? The US Fed says rates are “near normal”. The tightening cycle is closer to the end than the beginning. The tapering of the bond purchases will do what is required from here.
Brexit does NOT matter.
Chinese and American trade war will end. Global growth to rebound.
1. Safest Thematic – a stock that benefits from Chinese middle class tourism. BUY CROWN CASINO (CWN) 2. Avoid the financial sector. Pressure on margins; no growth (grew at 10 to 12% per annum through 1990’s and 2000’s, whilst the last few years has seen growth levels of 1 or 2%). It is hard to grow with constant margin pressure and no new loans. Plus this sector is still ripe for disruption – Apple – a corporate with a stronger balance sheet than most financial institutions, why not hold your money with them? Especially if they offer less charges and fees….AVOID banks and insurance companies.
3. The growth “darlings” will still be the best big caps in Australia. BUY CARSALES (CAR); REALESTATE.COM (REA) and SEEK (SEK).
4. Synchronized global growth will return which means commodities do well. BUY BHP (BHP) and Oil Search (OSH).
5. DO A CONTRARIAN TRADE – BUY Telstra (TLS) for the 5G rollout. Everyone wants to buy high yield stocks. What they don’t fathom is the payout ratio of earnings as a dividend. Most of the banks and WES etc are paying out 80% plus of earnings as a dividend. Telstra, who slashed its dividend, is only paying out 50% of earnings.
6. Growth and performance will be in small and medium caps. Most big caps are fully mature with subdued growth outlooks.
BEST SMALL CAPS (or should I say, FUZZY’S SMALL CAPS!)
TZL (19cents)– watch the numbers as this has turned the corner. Revenue could be a substantial multiple of its market cap. ($12m)
TTI (3 cents) – a boring traffic company (roads, signs, lights) that is reinventing itself with a Smart Cities platform. Again revenue is a considerable multiple of market cap. (market cap. $12m with EV $23m).
PAR ($1) – extraordinary results in the treatment of bone and joint issues (arthritic and otherwise). Market cap.$140m.
QUB ($2.60) – to benefit from a rebound in trade volumes.
DUB (40cents) – exciting voice recording platform that is being deployed by several large international telcos.
CAP(5cents) – risky but Chinese steel mills taking higher grade ore is a paradigm shift (environment).
MNS (28cents) – risky as they need a mountain of capex, but if they can pull it off then it is a major winner.
Peter Graham is an Authorised Representative (No.335948) of Delcor Advisory Group Pty Ltd, a Corporate Authorised Representative (CAR 1266622) of Delcor Asset Management Pty Ltd (ACN 605 111 760, AFSL 475210). Peter Graham is the author of Fuzzynomics newsletter. His views do not necessarily reflect the views of the Delcor Financial Group Ltd. This publication is intended to provide general advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on any information contained in this publication you should consider its appropriateness having regard to your objectives, financial situation and needs.
Oz Financial Disclaimer
Oz Financial Australia Pty Ltd trading as Reach Markets is a Corporate Authorised Representative (CAR No:431191) of Reach Financial Group Pty Ltd (ABN 17 090 611 680) who holds Australian Financial Services Licence (AFSL) 333297. The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts.
Read our full disclaimer here >
This publication contains general securities advice. In preparing the advice, Oz Financial Australia has not taken into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Oz Financial Australia and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Oz Financial Australia does, and seeks to do, business with companies that are the subject of its research reports. Oz Financial Australia believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Oz Financial Australia or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia. It is recommended that you seek independent advice and read the relevant Product Disclosure Statement before making a decision in relation to any investment. Any advice contained in this communication is general and has not taken into account the investment objectives, financial situation and particular needs of any particular person.