One of the most astute market watchers and stars of the local business TV circuit is CMC’s chief market strategist, Michael McCarthy. I invited him on my TV show on Monday to see how he was going to invest in 2019. He was joined by Bell Direct’s Julia Lee, who each week gives me her ‘Hot Stock’ of the week but I make her stick around so I can create a bit of a debate on stocks to watch or dump.
Later this week, Macca penned some of his insights for the Switzer Report, which you can see here below:
“In August last year, the US president tweeted: For all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming! And many investors cheered in response.
“This euphoric message was uncanny in its precision – in calling the market top. The global sell down in shares started soon after, and the S&P 500 index dropped 19.8%, just shy of the technical definition of a bear market. Sentiment at extremes can be a signal of an impending market change.
“Fast forward just four months, and sentiment has swung to the other end of the spectrum. Analysts are calling for a US recession in 2020. The old credit-crunch-in-China story is getting yet another run. The president of the European Central Bank warned on slowing growth, and click bait “news” sites are spraying their pages with “looming disaster”, “slammed” and “meltdown”.
“This might mean that the lows hit between Christmas and New Year are a turning point for share markets, and a new bull run is beginning. The chart shows that the technical picture has improved dramatically.
“The rally broke the downtrend and lifted the Australia 200 index over the short-term support/resistance at 5590, and the long-term level at 5640. These levels take on added significance. A fall below these points could mean further damage. However, while the market holds above these levels, in my view, the risks are on the upside, with potential for a move towards the zone between 5640 and 6000. Any break through 6000 would bring into view the 10-year high around 6375.
“Capturing higher portfolio returns over the long term depends on many factors. One of them is knowing which market narratives to track because ultimately markets are moved by the shift in balance between buyers and sellers. The changes in understanding that cause investors to act are a key to market direction. It’s important that investors identify the most influential market stories, given the impact of sentiment.
“The current freeze on government spending in the USA is a good example. While the US government shutdown is potential political dynamite, and generates lurid headlines, the global economic impact is far less significant. The shutdown means that a lot of spending is deferred, but not destroyed. There are parallels when a gold mining company experiences operational delays. The value of the gold in the ground doesn’t change, but the income from selling that gold is delayed. This is a negative, but generally a minor one.
“If the closure drags on for months, the situation may change. The risk for markets is more indirect, in that it may affect sentiment. Nonetheless, most professional investors are largely unconcerned.
“Economic growth, and in particular the growth outlook in Europe, China and the US, remains at the heart of market performance. The argument is now about the outlook for 2020, with some suggesting a tanking US economy will drag the world into another recession, given a slowing China economy and a moribund Europe. This is a factor in recent increases in volatility. Because the discussion is about events in the distant future, hard evidence is scant. Sentiment and positioning become more important in determining day-to-day market moves.
“The events that speak to this narrative in the near future are the US/China trade talks, the coming earnings seasons and Brexit. Investors may prepare for any event or change in story that pushes the Australia 200 index through the levels highlighted above.”
On my TV show, Macca argued that we will see a fair bit of sideways action in 2019 and again volatility like 2018. As a consequence, he thinks the best money will be made by stock picking, however, he had a nice lesson for those of us in the learning game. More on that lesson later.
“Active investors should perform best and buying the dip is still on,” he said. “The recent sell-off was so deep its created real opportunities.”
He’s not expecting a US recession this year and he pointed to the Bloomberg consensus that says US profit growth is sneaking up to 8.25%. At the height or maybe the greatest depth of the recent sell off, the forward P/E for the S&P 500 slumped to zero, which is crazy! I believe the revelation of this fact helped bring buyers back to Wall Street.
Julia Lee, who’s also a stock buyer in 2019 said “US companies had six to seven quarters of double-digit growth for profits”, so a fall back to 8% growth explains a bit of the recent sell off but there are also fears around the Fed and the Trump trade war.
Despite Macca’s belief that stock picking is the best strategy for 2019, he showed us a lesson on how he takes out ‘insurance’, in case he’s off the mark
“I’m long index calls so if I don’t pick the right companies I will still get the benefit of the rising market,” he explained. “I’m looking for the unpopular sectors, which often have big turnaround performances.
“I like the Costa Group and I like The Reject Shop,” he said. “I’m confident at current price levels they represent reasonable value. I own them both!”
As you can see, he’s not afraid of the beaten up retail sector but he is selective, so be careful.
“I’ve been looking at retail for a few weeks but I wouldn’t touch Myer with your money Peter.”
On the banks, he has this to say: “I’m long all four banks and Macquarie,” he revealed.
Julia Lee likes Costa Group too. “China is only 5-6% of its sales so there’s so much long-term potential,” she said.
Julia, who tends to be a pro-growth investor, surprised me when she admitted she liked my top 20 companies call in my Monday piece for this Report [1]. “Those companies have stable cash flows and can provide shelter from the storm in periods of high volatility,” she said.
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