In her monthly review, Julia discusses:
- May: a performance of two halves (0:45)
- Early upgrades & downgrades this upcoming confession season (2:01)
- Positioning for the new financial year (3:23)
- Slowing housing & rising risks (4:16)
- What to expect after the strong US Q1 earnings (5:17)
- The best regions to invest globally (6:37)
The month of May was a performance of two halves. The first was before three of the big four banks traded ex-dividend with the market rising 2.6% up until the 14th of May. Post the 14th, once the banks started to go ex-dividend, we saw the benchmark ASX200 down by 1.9%. The other weight on performance was Telstra down a massive 11% for the month.
- The top performers in May were Wisetech (+41.5%), Seven West Media (+35.1%) and Challenger (+22.1%);
- The bottom performers were Greencross (-18.2%), Retail Food Group (-15.8%) and Link Admin (-15.2%).
June is all about confession session. This is where companies come out with any divergence from their expectations before the full year earnings season kicks off in August:
- Early upgrades include ARB, Aristocrat Leisure, CSL and Qantas;
- Early downgrades include AMP, Amcor, Greencross, JB Hi-Fi, InvoCare, Gateway Lifestyle as well as Technology One;
- Stocks in an upgrade cycle with high expectations include a2 Milk, Altium, Corporate Travel Management, Lovisa, NEXTDC and Nine Entertainment;
- Stocks in a downgrade cycle with low expectations include Myer, Fletcher Building and Dominos.
Looking at the second half of the year, late cycle investments will be in focus. Traditionally, energy, commodities and health care tend to perform well at this part of the cycle. It will also be about increasing global exposure and in particular diversifying to regions which are earlier in the economic cycle. There will also be an increased focus on strong balance sheets with low refinancing risks as interest rates around the globe continue on their upward trend.
In Australia, we're expecting to hear about slowing housing and the risks it presents. We've seen housing prices now down 7 consecutive months and it looks like May will also be a weak number. Therefore, it is likely that risks will be skewered to downside in 2018. The most exposed area is the banks and whether we'ere going to see a full-blown loss cycle or just writebacks and recovery. The banks are supported by the regulatory environment, which means that we are more likely to see writebacks and recovery, rather than a full-blow loss cycle. Some other stocks that also may be impacted include Stockland and domestically focused building materials companies.
Looking overseas, strong US earnings are helping to support the market. We've seen a very positive result for the end of US Q1 earnings season with earnings growing by 25.6%. Although some of this is due to the Trump tax cut, that is more around the 7.5% mark, which still leaves underlying earnings growth of 18.1%. The key question for investors and the market is: are we seeing peak earnings growth? Markets are not being optimistic enough. We are yet to see significant euphoria, which signals a top in terms of the market.
If you are looking globally, emerging Asia, Asia and Europe look quite interesting. In emerging Asia, we're seeing growing demographics which should drive a long-term GDP growth trend, unlike a lot of the developed nations around the globe. We're expecting to see the global economy grow by 3.4% in 2018 with emerging markets expected to perform much better with a growth of 5.9%.