ASX fizzles post-vaccine, but this could be a game changer

James Gerrish

Market Matters

The ASX200 disappointed many investors on Tuesday only rallying 42-points after opening up nearer 140-points. The issue was we witnessed the most aggressive sector rotation that I can recall in many years. The “Big 4” banks surged on average more than 5% but only 51% of the index actually closed positive and 13 members of the ASX200 tumbled by over 10%. We wrote recently that Fund Managers were almost fully committed to equities but they were aggressively overweight tech and underweight banks/resources (value stocks). The last 24 hours has seen these established trends/positioning addressed slightly but you don’t realign many years of under-performance in just 1-day.

In our opinion the most significant impact to markets from the Pfizer vaccine announcement was the rally in US 10-year bond yields – they’ve now tripled since March’s panic low. This potentially game-changing move led to a fairly large/long alert from MM yesterday – yesterday we made more tweaks to our portfolio’s in 1-day than subscribers are used to in a month! While we’ve been flagging these very same moves for weeks it may have shocked some readers to receive them all in one hit but nobody was expecting a vaccine when we went home on Monday.

We believe the vaccine generated rally in bond yields is at least a tactical game-changer on the macro-side. Its important to understand MM’s read through from this rally in yields after all interest rates are arguably the most important driving force of all asset classes and their subsequent valuations. There are four key drivers behind our view:

  1. We remain bullish stocks but with deteriorating index momentum (underperforming growth). The new breakout in the US S&P500 targets 6-10% further upside with a similar projection locally.
  2. The COVID vaccine announcement triggered a sharp sector rotation from growth into value. Yesterday’s rally finally saw strong appetite for the financials and oil stocks, plus to a lesser degree the mining sector and their associated service providers. We now anticipate a break of the 2020 outperformance trend of growth versus value which by definition will cap the index momentum of the major US indices.
  3. Internationally we expect to see Asia/EM outperform while Europe could be the big catch-up trade into year-end and into 2021 – a scenario we discussed last week.
  4. Medium-term we remain bullish stocks/risk for at least the next 6-months but this maturing bull market will not be one-way. We believe the rotation will continue creating a staircase like advance for stocks that will feel almost bearish if you look at the wrong sectors, at the wrong time.

MM remains bullish equities into 2021

US 10-year Bond Yields Chart

The local ASX200 has now rallied over 9% in the last fortnight as it embraces the US election and vaccine news. From a technical perspective, while the index can hold above 6225, our 6500 target for 2020 may even prove too conservative. But at least a “little rest” after the recent strong gains would not surprise. My “Gut Feel” is the buying in the banks and resources will continue, but the aggressive selling of some tech names will abate slightly pushing the underlying index higher.

MM remains bullish the ASX200 into 2021

ASX200 Index Chart

The picture is very similar locally for bond yields even after the RBA cut interest rates on Melbourne Cup Day. But with our central bank committed to holding 3- year bond yields at 0.1% for the foreseeable future, it will interesting to see how far longer-dated bond yields can indeed advance.

MM Believes bond yields have bottomed

Australian 10-year Bond Yield Chart

Our medium-term strategic view towards the $US and $A respectively hasn’t changed following the vaccine news, we are bearish the $US targeting fresh 2020 lows – in other words, our core reflation view is intact which should be good fundamentally for the banks and resources.

MM remains bullish the $A with an initial target ~80c

The $US Index) Chart

Overseas markets

Overnight US stocks were again a mixed bag with the Dow Jones rallying 262 points outperforming the broader S&P 500 which was flat and well ahead of the tech-laden Nasdaq which fell 1.74%. The smaller caps in the US as shown via the Russel 2000 was the standout, closing back above its pre-covid peak as money transitions into more value-orientated smaller cap industrials.

MM remains bullish US stocks through 2021

Russel 2000 Index Chart

The rotation from growth (tech) to value (banks, resources, select industrials) continued last night and for subscribers who are thinking that enough is enough a quick glance at the 2 sectors relative performance this year, and since the GFC illustrates it’s only a bump in the road to-date. This very fact compared to our interpretation of bond yields/reflation moving into next year resulted in our major portfolio tweak yesterday, in other words, we don’t remotely believe this horse has bolted too far yet.

However it's important to know that this is a valuation interpretation, many of the growth stocks are excellently positioned for the structural shift by the global economy but when stocks like Zoom (ZM US) rally 600% in a matter of months sharp pullbacks are almost inevitable.

MM prefers value over growth into 2021

US S&P500 value & growth Indices Chart

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Any advice provided is of a general nature only.

James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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