It’s Not Over Yet, but Lift the Bar on Defence
- A Correction and Not the End of the Cycle. In our view, the equity market sell-off in the past few weeks is a correction and a return to more normal levels of volatility rather than the start of an earnings recession. Indicators such as the yield curve, credit spreads and the Fed’s Loan Officer’s Survey all suggest the cycle still has legs. However, the market is beginning to price an EPS growth slowdown and risks are rising as we come towards the end of the cycle.
- Moving Back to a More Normal Trading Environment. Investors should expect higher volatility during a Fed tightening cycle and it has been surprisingly absent during the past 12 months, apart from the current episode and the January correction. We think we are probably returning to a more normal late-cycle equity market environment than we have seen for a while. However, risk assets should still probably outperform bonds and cash.
- Growth runs over a speed bump. In our September model portfolio update, we moved underweight Miners, remained underweight Banks and held no Telcos and only one Tech stock (WTC). We decided to diversify the portfolio by adding a net number of 4 stocks and skew the portfolio towards more towards defensive earners. However, this also meant we raised the bar on several Growth stocks that have been at the pointy end of the correction. In hindsight, we would have seen better performance over the past few weeks by picking out some Value stocks. However, for Value to outperform over an extended period, earnings must be sustainable and we could not find enough candidates to meet this criterion.
- Defensive Growth can be rewarded. Instead, we tried to add stocks with more defensive earnings. In Consumer Discretionary, we added TAH, and NVT, while in Healthcare we added RMD. TAH, NVT and RMD demonstrated good defensive earnings quality during the recent reporting season and we think this will be rewarded as the global bull market matures. CSL, COH and ALL have all disappointed in the past month or so, despite good earnings reports in August. However, we think these stocks will again outperform in the months ahead as defendable earnings rather than Growth at any valuation is rewarded.
Cochlear is a for-profit entity and operates in the implantable hearing device industry. Co.'s implant systems comprise an implant which is inserted during surgery and an external sound processor. As of June 30 2016, Co. sold in over 100 countries and had a direct presence in approximately 20 countries and used distributors and agents in other areas. Manufacturing for the cochlear implant product range is based in Australia. The bone conduction implant product range is manufactured in Sweden. Co.'s supply chain operates with product being distributed from its manufacturing sites in Australia and Sweden to its regional distribution centres in the U.S., the U.K. and Panama.
CSL is engaged in the research, development, manufacture, marketing and distribution of biopharmaceutical and allied products. Co.'s operations are divided into three segments: CSL Behring, Seqirus, and CSL Intellectual Property. CSL Behring is engaged in manufacturing, marketing and developing plasma therapies (plasma products and recombinants). Seqirus is engaged in manufacturing and distributing non-plasma biotherapeutic products. CSL Intellectual Property is engaged in the licensing of intellectual property of Co. to unrelated third parties. Co. operates primarily in five specific geographic areas, namely Australia, the U.S., Germany, Switzerland, and the U.K.
Navitas provides educational services to domestic and overseas students. Co.'s segments are: University Partnerships, which delivers education programs, via pathway colleges and managed campuses, to students requiring a university education; SAE Institute, which delivers education programs in creative media including courses in audio, film and multimedia; and Professional and English Programs, which delivers English language tuition, jobs skills training and higher and vocational education in health, security and psychology, and is comprised of four business units: English and Foundation Skills, Careers and Learning Skills, Navitas Professional Institute, and Training and Development.
Tabcorp Holdings is an Australian gambling entertainment company. Co. has three segments: Wagering and Media operations, which includes its network of TAB agencies, hotels and clubs, and on-course totalisators in Victoria, New South Wales and the Australian Capital Territory (ACT) as well as its Three Sky Racing television channels broadcasting thoroughbred, harness and greyhound racing and other sports; Gaming Services business, which consist of Tabcorp Gaming Solutions that provides a mix of gaming capabilities, services, advice and financing to licensed gaming venues; and Keno business, a random number game that is distributed to clubs, hotels and TABs and is available online in the ACT.
About us:
- The business is a Proprietary Limited Australian company that is owned and fully operated by Shane Lee from a small office in Sydney’s CBD.
- Shane worked for 17 years in Sydney-based senior research roles (economist, equity strategist and bond strategist) in global and regional investment banks and a domestic commercial bank prior to starting Macro Strategy Advisors. These roles straddled the asset classes making him uniquely positioned to advise multi-asset investors. He worked for the Reserve Bank of Australia (RBA) for 3 years as a housing, commercial property and equity market analyst and a liquidity forecasting specialist. He worked as a structural engineer in Queensland for 10 years prior to his career at the RBA.
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- To partner with our clients in their aim to maximise returns. We provide timely, independent and thought-provoking research on thematic macro issues that are impacting or could impact financial markets. We aim to produce research that prompts our clients to question their assumptions.
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- Regular presentations and data support delivered by understanding our clients interests and investment process.
- We also in work in confidence to investigate, analyse and report on issues at our clients direction. This work is done on a project-by-project basis.
- As an Australian based business, the main focus is analysing how domestic and global issues impact Australian investors. However, our global and domestic insights are also valued by our offshore clients.
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- Shane’s background in engineering has provided clients with unique insights into global infrastructure and domestic housing issues.
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