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Rudi Filapek-Vandyck has been a journalist for nearly three decades, of which nearly two decades in finance. After successfully establishing a leading financial news service in Europe, Rudi moved to Australia where he founded FNArena, an online service dedicated to providing independent and unbiased market analysis and develop new tools and applications that assist investors in their market research.

As Editor of FNArena, Rudi's market analyses are regularly reprinted elsewhere. He has become a regular guest on Sky Business and BoardRoomRadio, while traveling through the country educating investors and sharing his observations and market insights. FN Arena can be trialed at no cost and with no obligations. Simply sign up & get a feel for what we are trying to achieve.

  
 
  
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Rudi's Message
Rudi's Message
post Posted: Nov 9 2011, 09:49 AM
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Will Markets Be Saved By More Stimulus?

This won't come as a surprise to anyone, but Europe is increasingly causing headaches and worries to economists and investment strategists the world around. Not necessarily because of Greece's political instability or because of rising yields on Italian government bonds, though that's a genuine worry too, but because of leading economic indicators pointing towards economic recession. As we all know, any struggle with too much debt can easily become something much more sinister if this struggle happens against a background of negative economic growth.

How badly will a recession in Europe affect the rest of the world?

While the latter question is still very much up in the air, the October round of manufacturing and non-manufacturing surveys around the world have brought home a few truths about the current state of affairs in the final quarter of 2011:

- growth in all developed economies remains sub-trend and vulnerable to shocks of any kind
- despite improvement in the employment component, the US ISM fell to its lowest level since January 2010
- the new orders component in the US ISM survey tumbled, suggesting the outlook remains weak
- Euro area services activity PMI is now more than 10pts below the March cyclical high, though Germany's appears to have stabilised above 50
- Emerging countries including China, Brazil and Russia are showing mild improvements, but not India (where deterioration is looking ominous)
- if it wasn't for a big improvement in Japan, the global All-Industry PMI as compiled by JP Morgan might have contracted in October
- JP Morgan suggests the October All-Industry PMI corresponds with no more than 1.6% global GDP growth this quarter, which is below market expectations

Will the Federal Reserve go beyond its present Operation Twist? A growing number of experts in the US certainly seems to think so.

Note that Prime Minister Julia Gillard has promised the G20 she will launch another domestic fiscal stimulus program if indeed the European crisis impacts on global growth and that the International Monetary Fund (IMF) at the same time urged more stimulus from financially strong countries if indeed the situation in Europe worsens. Let's face it, this is now all but assured.

What about China?

Well, China is part of the select group of "financially strong countries", together with Brazil, Indonesia, Korea, Canada and Australia, but even apart from this, experts are increasingly expecting Beijing to re-open the stimulus gates soon. Last week, China watchers at ANZ Bank issued a report that carried the title "China: An Outright Policy Easing Is Imminent". ANZ is not just expecting a mild policy switch, the economists are predicting a 50bp cut to the reserve requirement ratio (RRR) for all banks, plus a possible 100bp cut in RRR for small banks on top of current measures to lower the tax and regulatory burdens on small and medium-sized enterprises.

One asset that is poised to benefit from a new round of stimulus is gold. No surprise thus, the price of gold is on the rise again, with technical market analysts at Barclays reporting to their clientele on Monday, they anticipate a break above technical resistance at US$1775/oz which would shift the market's focus to near US$1840/oz. Precious metals analysts at Deutsche Bank have already started talking US$2000/oz for the near future.

Analysts the world around are increasingly turning positive on prospects for Chinese equities. Recent history shows, or so the saying goes, that China leads global equities by up to three months...


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post Posted: Nov 3 2011, 09:47 AM
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Worst Time To Enter The Share Market?

Here's for an easy prediction to make: unless earnings forecasts start rising at some point, the October month rally for global equities will not prove sustainable.

Analysis by Macquarie has revealed the correlation between the performance of equities and changes in forecasts by stockbroking analysts has become increasingly stronger in recent years. Corporate earnings forecasts started trending south again in July, on a global scale, and they have remained in a negative trend since. Virtually every expert seems to agree more cuts and downgrades remain on the agenda as global economic forecasts have weakened in the weeks past and that puts downward pressure on what individual companies can achieve in terms of margin expansion and sales. The implied margin expansions for industrial companies the world around in particular is receiving quite some attention (and criticism), but there are plenty of question marks for other sectors too, including producers of natural resources.

The fact that global earnings forecasts made a concerted dive into negative territory in July has experts worried. Analysts at UBS and Macquarie, for example, believe a new "downcycle" has started in earnings forecasts. This is not unimportant as the past years have shown that upcycles and downcycles in these forecasts support similar moves in equity prices. Unsurprisingly, the last up-cycle took off in 2009, weakened in 2010 but improved in the second half of last year until May. Making matters worse, both UBS and Macquarie believe the early stages in such a downcycle are the worst for equity performances.

On historical evidence, and assuming all else remains equal, investors should not expect more than single digit returns from the Australian share market in the year ahead, predict both UBS and Macquarie. The good news about this historical forecast is that the ASX200 is today circa 6% below where it was in early July (4600) when this latest downcycle started. This means that on pure statistical form, the index can gain double digits in the next nine months and still remain inside the boundaries as suggested by historical precedents.

The other good news is that the next stage in the cycle will be the best one to enter the share market, generating on average the highest returns, all else being equal. Historical analysis clearly shows that when earnings forecasts are negative and falling (is the case since July), this is usually the worst time to buy into equities. However, when earnings forecasts are still negative but they start turning the corner, which will be the next phase in the cycle, this tends to be the best time to be in equities, generating close to double digits on average in the year ahead.

All this assumes the close correlation between earnings forecasts and the performance of equities as has been in existence throughout the first decade of this century remains intact. (Note: Macquarie research has generated slightly different numbers, but still similar to UBS's thus confirming the underlying thesis).

Of course, nothing is ever set in stone in the world of finance and investing. What could change the course of earnings expectations? Another round of Quantitative Easing in the US could, and some experts believe we may see QE3 back on the agenda as early as Q1 next year. A new stimulus program in China could shake up things as well, though this is at present not anticipated by anyone. A much better performance of economies in the US, Europe and in China could make a big difference too. Last but not least, big movements in FX markets can have a pronounced impact too, but mostly in a negative sense outside the US if these moves are based upon a weakening USD.

So how is the Australian share market positioned at this stage?

It has to be noted rating downgrades by stockbrokers have been outnumbering upgrades for several weeks now. The week past, for example, saw 25 downgrades against 11 upgrades suggesting more and more equities are becoming less attractive from a fundamental (value) view point, despite the index still being in negative territory for the year.

As far as earnings forecasts are concerned, on FNArena's consensus forecasts for members of the ASX200, corrected for outliers and excluding the six banks, stockbroker analysts are already projecting less than 5% growth only for FY12. While this number is expected to more than double in FY13 (up 13.8%) there are still many question marks about whether this will prove rather wishful thinking or not. Investors should note there's a clearly visible downtrend in earnings estimates for banks as well as for large resources companies, with most companies concerned coming from elevated growth numbers in years past (not expected to be repeated in the years ahead).

On an individual basis there are, of course, plenty of companies whose growth will exceed the market's average in the year(s) ahead. Investors will have to pay close attention to two critical points: is that growth potential already reflected in the share price? Plus what are the chances that growth expectations might not be met?


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post Posted: Oct 12 2011, 12:18 PM
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To Rally Or Not To?

There's a strong divergence in opinions and views from share market experts as to whether the rally in global equities that started in early October has much further to go. In case of a positive answer, traders should remember those stocks that fell the furthest have more upside potential. Longer term investors, in my view, should avoid getting confused and stick to their solid, sustainable dividend paying industrials.

Below are ten reasons as to why the rally should have legs, and ten reasons as to why it shouldn't.

Ten reasons why a rally is likely:

- Equities are cheap on virtually every possible valuation and comparison method; vis-a-vis government bonds, vis-a-vis historical averages, on implied dividend yields, on corporate cash flow levels, on Price to Book valuations, et cetera
- Mining stocks and banks (the two leading sectors in Australia) both look ultra-cheap, not only in comparison with historical references but also in comparison with defensive stocks that now have outperformed for most of this calendar year
- Banks often lead the share market in general and the sector is about to report FY results, while offering high and sustainable dividends, and with the bond market increasingly convinced the next move in the RBA's cash rate is down, not up
- History shows bank stocks usually start outperforming in the lead up to RBA rate cuts (this could bode well for the share market in general)
- Technically, risk assets seem poised for a relief rally, at the least
- Globally, investor sentiment readings are again close to historic lows while cash holdings of super funds (and other investors) and households are at decade and a half highs, suggesting an ever diminishing pool of potential sellers
- Also, the current market recovery measured from the peak in November 2007 is now lagging similar recoveries post burst bubbles in the twentieth century (even in comparison with post 1929)
- Historical analysis suggests returns are highest when the US Vix index sits in between 40 and 50; last week the Vix rose to 45
- History also shows we have now entered the most profitable period for owning equities (October-April as opposed to May-September)
- The overall news flow has been extremely negative since May, a simple no more negative news will likely provide relief and thus an opportunity for investors to re-assess and re-enter beaten down equities

Ten reasons why any rally should remain short lived:

- In an environment of such elevated macro risks, apparent cheap valuations for equities do not necessarily imply equities will indeed turn out to be genuinely "cheap"
- Global equities are going through a long-term de-rating process, so cheap P/Es and valuations are likely to become cheaper still, though not necessarily in a straight line south
- Price-Earnings ratios (P/Es) are low because of weaker share prices, but earnings forecasts still have to come down more. This automatically pushes up P/Es and will make equities a lot less "cheap" than they appear to be
- Global earnings estimates have just entered a down-cycle; history suggests this process takes much longer and will continue weighing on equities while ongoing
- Corporate profit margins in the US are at peak levels, this will make continued strong earnings growth a challenge, in particular from FY12 onwards
- The political process in Europe remains convoluted and with built-in barriers, which means high volatility rather than a swift process is here to stay, while more banks will need bailing out, and more sovereign credit downgrades will follow
- Greece will default - we have as yet still to discover how exactly this is going to impact on... everything, really
- Contrary to popular belief, five or six months of declines do not guarantee positive returns in the year ahead
- Many of the pre-2007 excesses in debt, leverage and credit-led consumption are now mean-reverting which implies previous over-shoots to the upside will now be replaced by under-shoots to the downside
- The US dollar seems to have started a medium-term uptrend. This, history shows, tends to coincide with either weaker equities or at least a brake on rallies

Regarding my personal view, which at this point is as worthy as anyone else's, I hope there will be more on the agenda than simply short rallies that don't last, but I worry it might turn out too early just yet. Market strategists at Morgan Stanley recently issued a report titled "Hope Is Not A Strategy".

I agree.

 
Rudi's Message
post Posted: Oct 5 2011, 02:33 PM
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Who's Afraid Of October?

Afraid of October? You shouldn't be. History shows there's room for optimism.

The month October has a fearsome image amongst investors. One quick look at the twentieth century immediately reveals where those fears stem from; October has hosted some of the better known, savage market sell-offs over the past one hundred and four years.

It was in October 1907 that the US experienced a run on the banks coupled with panic in the stock market. A consortium led by John Pierpont Morgan at the time brought calm and stability, effectively operating similar to the Federal Reserve today (there was as yet no Federal Reserve back then).

In October 1929 the great bull market of the 1920s came to an abrupt end with US equities dropping 23% over two days. 59 years later, in October 1987, Black Monday saw a 22% sell-off on one single day. And then, of course, there was that dreadful month post the Lehman collapse when markets froze and authorities had yet to act decisively. At one point during that month, US equities were down by 27% for the month. In Australia, the ASX200 index had just fallen through the 5000 level in late September. By late October it had barely scrambled back above 4000. A few weeks later it was solidly below 4000.

With such a track record, it is no wonder the mentioning of October usually puts fear into an investors' mind, especially when combined with September, the month carrying the dubious label of worst month for the year in terms of average historical returns. Actually, September's historical performance is negative so it is not difficult to fathom where investors' discomfort comes from this time of the year.

However, look beyond these historical crashes (while of historic proportions each, there's only four of them, in 104 years) and a different picture emerges for the month October, one that often sees equities bottoming at the end of a tough ride, and rallying instead. Indeed, while October is never mentioned in terms of "bull markets" or "rallies", history shows the month has a solid track record for starting both, which raises the obvious question: why are we so afraid of October because of a few negative events, while the overall balance is merely positive?

Historic data show October delivers a positive return about two out of every three years. History also shows weak September performances are often followed by equities reaching a bottom in October, followed by rallies higher. As such, October is in some circles known as the "Bear Breaker";the month has a track record for finding a bottom and setting equities up for solid rallies higher. For example, after Black Monday in 1987 investors would have done well buying into a significantly weaker share market. Similar conclusions can be drawn from October experiences in 1990 and 2001.

Let's have a look at the past nine years:

1. Six positive performances have been offset by three negative performances which is in line with longer term average data: two out of every three years tend to be positive. It has to be acknowledged though, the past four years saw two negative performances and two volatile performances, so maybe the times of simply witnessing a rally taking off in October are no longer upon us?

2. September appears to be acting as an opposite indicator; a weak September tends to be followed up by a positive October and vice versa.

Conclusion number two in particular could potentially bode well for the next four weeks.


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