Aussie Equities Month in Review       (September 2019)

Aussie Equities Model Portfolio Update (October): Sticking to the Knitting

Aussie Equities Month in Review (July 2019)

Aussie Equities Month in Review (August 2019)

ASX Reporting Season Update: Misses and Downgrades Amongst Bright Spots

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
The Global rotation away from Defensive stocks to cyclical Growth and Value over the past few weeks has not been impressive enough to convince us it will continue. The trade has been underpinned by the sell-off in global bonds on the back of token gestures between US and Chinese trade officials, while global earnings growth continues to track down.  An adjustment higher in the term-premium from the lowest level on record seems to be at the heart of the adjustment in yields.</li>
<li>
Our scepticism about the sustainability of the bounced back in Value is supported by the fact that even as Value has rallied, Growth has managed to rally too – it has just underperformed. The underperformance of Growth has been more striking in the US than in other markets such as Australia.  Indeed, in Australia Growth valuations actually rose during its period of underperformance.</li>
<li>
The Growth underperformance was driven by predominantly by Software and Healthcare Equipment &amp; Services names. The top 6 underperformers were PME, APX, CUV, IEL, NAN, and BVS.  All of these stocks apart from NAN have strong earnings quality and free cash flow growth.  But they also trade on large PE premiums that make them susceptible to higher bond yields.</li>
<li>
The Value outperformance was dominated by Resources and Diversified Financials. Recent stability in the price of iron ore at $US90/t and the rally in the price of Copper and oil seem to have encouraged Value hunters in these stocks.  The trade-in Diversified Financials seems to be underpinned by hopes of stability in earnings of the wealth managers (AMP and IFL) and rising bond yields (CGF). </li>
<li>
Our model portfolio has a late-cycle Growth bias via COH, CSL, and RMD, which remain underpinned by a strong earnings outlook.  The defensive barbell is also propped up by overweight positions in Real Estate as protection for late-cycle volatility.  WTC and TNE are included shore up our preference to Growth over Value.  We also have overweights in Energy, the diversified miners and Consumer Discretionary names such as ALL, WES and BAP, which should benefit from any marginal improvement from rate cuts and tax credits. </li>
<li>
We think it’s too early to move more defensive and we are reluctant to go Value hunting until we are convinced the end of the cycle is approaching.  Earnings durability is important late-cycle especially given there has already been a large decline in bond yields meaning interest rate sensitives are unlikely to run significantly further.</li>
</ul>



The Global rotation away from Defensive stocks to cyclical Growth and Value over the past few weeks has not been impressive enough to convince us it will continue. The trade has been underpinned by the sell-off in global bonds on the back of token gestures between US and Chinese trade officials, while global earnings growth continues to track down.  An adjustment higher in the term-premium from the lowest level on record seems to be at the heart of the adjustment in yields.

Our scepticism about the sustainability of the bounced back in Value is supported by the fact that even as Value has rallied, Growth has managed to rally too – it has just underperformed. The underperformance of Growth has been more striking in the US than in other markets such as Australia.  Indeed, in Australia Growth valuations actually rose during its period of underperformance.

The Growth underperformance was driven by predominantly by Software and Healthcare Equipment &amp; Services names. The top 6 underperformers were PME, APX, CUV, IEL, NAN, and BVS.  All of these stocks apart from NAN have strong earnings quality and free cash flow growth.  But they also trade on large PE premiums that make them susceptible to higher bond yields.

The Value outperformance was dominated by Resources and Diversified Financials. Recent stability in the price of iron ore at $US90/t and the rally in the price of Copper and oil seem to have encouraged Value hunters in these stocks.  The trade-in Diversified Financials seems to be underpinned by hopes of stability in earnings of the wealth managers (AMP and IFL) and rising bond yields (CGF). 

Our model portfolio has a late-cycle Growth bias via COH, CSL, and RMD, which remain underpinned by a strong earnings outlook.  The defensive barbell is also propped up by overweight positions in Real Estate as protection for late-cycle volatility.  WTC and TNE are included shore up our preference to Growth over Value.  We also have overweights in Energy, the diversified miners and Consumer Discretionary names such as ALL, WES and BAP, which should benefit from any marginal improvement from rate cuts and tax credits. 

We think it’s too early to move more defensive and we are reluctant to go Value hunting until we are convinced the end of the cycle is approaching.  Earnings durability is important late-cycle especially given there has already been a large decline in bond yields meaning interest rate sensitives are unlikely to run significantly further.


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