Rudi: The ASX ‘looks’ like a bargain hunter’s paradise

In what is becoming a bit of a tradition, I fired up the Zoom account to have a chat with Rudi Filapek-Vandyck, Editor of FN Arena, ahead of the August 2022 Reporting Season. Readers will know that Rudi has been singing from a cautious hymn sheet since the start of the year, and, for the most part, that is still the case.

In February, Rudi revealed that he was holding as much as 30% of his portfolio in cash, which still sits above 20%. But this is no bearish tale. In fact, Rudi believes that some of the macro headwinds are now in the rear-view mirror, meaning investors can focus their attention on fundamentals and the underlying performance of individual stocks.

His focus has turned to some of the most resilient or high-quality stocks in the market; surprisingly, these reside in the heavily beaten down sectors. In the following interview, Rudi responds to questions around ‘market timing’, explains why he thinks resource stocks are a bad bet in a recession and shares the large-cap stock (amongst others) that he believes is set for a golden era.

In the interest of time, I have provided a summary of the discussion and time codes for the video below. 

Topics discussed

• 0:34 – The misunderstanding between market timing and managing risk
• 3:00 – Rudi's current cash holdings and why he is keeping his powder dry
• 6:35 – How recession proof are resources stocks
• 10:11 – The resilient stocks Rudi likes now that bond yields have peaked
• 14:39 – Previewing Reporting Season August 2022
• 17:40 – Is the ASX a bargain hunter’s paradise?
• 20:25 – Is the market already factoring downgrades?
• 23:05 – Rudi's picks for reporting season

Note: This interview was recorded on Tuesday the 2nd of August 2002

Timing the market or managing risk?

The last time we spoke, some debate around ‘market timing’ took place in the article's comments section. I asked Rudi to clarify his position and if he was trying to time the market. He believes people spend too long trying to time absolute tops and bottoms in markets. It is near impossible to do.

He does, however, look to adjust the level of cash in his portfolio when he believes market risks are skewed to the downside.

“I’m not timing the market. I’m simply adjusting my portfolio in line with the risks that I see ahead.” Rudi Filapek-Vandyck

Rudi says he currently holds 22% cash in his portfolio, and the significant risk is around corporate earnings' resilience. As he explained in a recent article – many parts of the market are still not that cheap.

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Resources aren’t recession-proof – they have never been!

Many investors have gravitated toward resource stocks to hedge rising rates and inflation. Rudi cautions against viewing these businesses as ‘recession proof’, and his rationale is quite simple.

“It has never happened – that commodity prices have held up in the face of a recession. You are betting that something that never happened before will happen.” Rudi Filapek-Vandyck

He also explains that low PEs in commodity stocks are a mirage and that low PEs are predicated on commodity prices staying at current levels or heading higher.

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This point also feeds into his view that the current market is not cheap. With the financials and resources sectors trading on below market multiples, it hides the fact that many sectors are still ‘not cheap.

His analysis of broker ratings shows that 59% of ratings are still ‘buys’. His view is that there still needs to be an adjustment lower in terms of earnings expectations, and this will push the market multiple even higher OR share prices will adjust lower.

An era of quality is opening up

Rudi’s go-to stocks are those that he believes are superior quality. You can read more about what he calls “Phase One” in the wire below. Stocks like CSL Limited (ASX: CSL), Goodman Group (ASX: GMG) and Technology One (ASX: TNE) are high on his shopping list.

He also says that the tide has turned for Telstra (ASX: TLS), and irrespective of what happens in August, he believes a positive trend is now in place for a stock that has been a serial disappointment for many investors. 

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Phase One: The Quality recovery

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