Quality Is Making A Come-Back

Look closely, and investors will see that quality stocks are making a comeback after being left by the wayside in the Trump-inspired reflation trade last year. CSL is trading around $128. Ramsay Health Care is back around $70. Amcor is well above $15, and InvoCare is approaching its all-time high from July last year. Clearly, quality never stays out of fashion for too long, as proven once again. But what does the return of quality mean? A pause in the reflation trade? Or is this indicative of a more cautious positioning by large fundies? The good news is that with a broadening inclusion, that 6000 target for the ASX200 looks easier achievable.

One swallow does not a summer make, but it appears the upward trending share market in Australia became more inclusive in March in terms of high quality, premium priced corporate success stories.

Stocks like CSL ((CSL)), Ramsay Health Care ((RHC)) and Amcor ((AMC)) used to be the beez kneez, with everyone wanting to be on board, until mid last year when laggards turned into champions, and vice versa and all of a sudden nobody wanted to get on board anymore; everybody wanted to jump ship instead.

It has been a tough few months for yesterday's share market champions since. There was a brief recovery rally in December, but otherwise, the post-Trump election rally has been all about banks, resources, and deep value cyclicals. Many an investor learned the hard way that industrial companies of exceptional quality like CSL and Ramsay might be the better performers in the long run, and through the cycle, but they do not perform always and all the time.

March seems to have changed the market's attention, at least a little bit. Consider, for example, that Amcor shares appreciated by more than 7% during the month. CSL added a further 6% on top of the +17% in the first two months. Pact Group ((PGH)) gained 5% and so did REA Group ((REA)). Bapcor ((BAP)) and Link Administration ((LNK)) are not far behind.

Ramsay's 0.2% gain doesn't look like much, but the shares made a remarkable come-back after plunging to $62.5 in the middle of the month.

Ex-dividends, the ASX200 advanced some 2.7% in March, or circa 3.6% including dividends. All of the above mentioned industrial All-Weather Stocks outperformed the broader market in March, which raises the question: what does it mean?

Why have investors again included expensive looking, more defensive-oriented growth stories when deciding where to allocate fresh money?

Is it because materials (read: mining stocks) and telecom stocks put in a rather disappointing performance? Is it maybe because all Big Four Banks are trading circa 6% above consensus price targets? Or is it because of the general pre-occupation with the ASX200 seemingly poised to sprint to 6000 and the but logical conclusion that the banks cannot possibly achieve this target on their own?

Maybe some of the answers we are looking for can be found in recent surveys of institutional investors by Citi and by Goldman Sachs.

The Citi survey is limited to institutional clients of the international financial services provider in the USA. It shows institutional investors remain confident and positive, but less so than in December. The majority view seems to point to benign gains for the year ahead, with remarkably less emphasis on value stocks than in the initial phase of this rally.

In Australia, a survey of active fund managers by Goldman Sachs reveals a rather unusual overweight position for both banks and resources, but also a return to quality stocks now that the huge gap that existed between deep value and quality industrials has narrowed considerably. Active funds managers have thus far stopped short of embracing "junk", or "low-quality stocks", reports Goldman Sachs. They've started buying quality again instead.

Equally noteworthy, the present combination of active fund managers being net long Resources and Banks at the same time has occurred less than 4% in such surveys over the past twelve years, reports Goldman Sachs.

Another observation to make is that equity investors worldwide seem to have become more comfortable with the outlook for US interest rates, and, by extension, the future trajectory for US bond yields. No more are the gloomy predictions that were doing the rounds in 2016, as well as the panicked selling that saw shares in bond proxies dive by -15-20% within a brief time span.

Within this framework, I note shares in Transurban ((TCL)) are back within rallying distance from their all-time highs reached last year. In between, the shares sunk -24% and paid out two half-yearly dividends. Go figure. Sydney Airport ((SYD)) shares have rallied some 13% since March 7. Shares in Goodman Group ((GMG)) posted a new post-GFC high at the end of March.

Quality is back on investors' radar, or so it appears.

This possibly bodes well for investors whose portfolios contain a chunk of mid to small cap industrial growth stocks that have failed to fully participate in this global upswing since August last year.

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