The news that China was going to pull out a bazooka to stimulate its flagging and disappointing economy was a great bonus for mining stocks that have been languishing over the past nine months. And last week our big mining companies saw their share prices spike, big time.
This has made it timely for me to remind you of two of the most important lessons when it comes to making money out of stocks, apart from being sensibly diversified and not over-exposed to one stock or investible asset. All this is relevant as we witness the early stage of a rotation that I’ve been tipping was on the way from many of our top 20 stocks, to other companies that suffered as interest rates rose 13 times, thanks to the RBA.
The best evidence that rotation is happening is the month’s performance of EX20 (the Betashares ETF), which is up 4.8% to $21.94.
EX20
An investment that I always like for my financial planning clients is Vanguard’s Australian Share Index ETF (or VAS). However, this ETF has only gone up 2.98% over the past month, which is a nice return but not as good as EX20. Why? Well, VAS picks up the gains of a lot of companies benefitting from the recent rotation into smaller cap businesses, but it also has exposure to the top 20 stocks (such as big four banks). This means that while VAS has many small winners, it has some big cap losers.
In contrast, EX20 is the ETF that captures the stocks numbering 21 to 200 in the S&P/ASX 200. I suspect it will keep doing well and should get a boost when interest rates are either close to being cut or actually are cut. Having said this however, VAS will pick up a lot of this rotation because it has the stocks numbering 1 to 300 and once the sell-off of many of the top 20 stocks is complete, then VAS will be powered by the smaller cap stocks that will benefit from lower interest rates. So, what I’m saying is that VAS isn’t as good as EX20 at the moment but once the sell off of the big caps is over, it will pick up steam.
Also, VAS will benefit from the bounce back expected for BHP, Rio and Fortescue now that China has signed for some jumbo-sized stimulus and that’s why I have been recommending both EX20 along with an exposure to the likes of our big miners, which were classic examples of quality companies that were victims of a market bashing.
I always argued that this would be a temporary pothole in the road for these good stocks and my positive view about these stocks was always predicated on the view that China would eventually start growing at higher rates. This revelation that Beijing is set to pump up their economy with both monetary and fiscal stimulus explains why BHP was up 13.38%, Rio rose 15.13% and Fortescue spiked 16.52%.
Add this story to what happened over the past 12 months for the likes of CSL. It is up 13.68%, though it was higher until the recent rotation. Along with CSL, we advised Xero (XRO) was a classic quality company that was oversold. It’s now up 32.28% for the year. The same argument applied to Macquarie (MQG). It has added 39.21% for the past 12 months.
Furthermore, we have argued that Resmed (RMD) is yet another quality stock that was oversold. It has now surged 49.03% over the year. While you can occasionally get it wrong betting on quality, history shows that buying quality is a good general strategy to build wealth. However, there is a related lesson to buy quality shares when they’re cheap.
And what’s that? Well, you have to be patient and hold your nerve. Over the past two years I’ve been expecting a rising Aussie dollar and got in too early because the impact of rising interest rates and its assault on inflation was slower than I expected. But the hedging of IHVV (iShares S&P 500 (AUD Hedged) ETF) is now producing nice returns.
IHVV
That’s a 31.18% over the past year, which undoubtedly will be a gift that keeps on giving, as long as the S&P 500 keeps rising in concert with the $A that soon will be in the 70 US cents plus region, after rising 7.4% over the past year.
Important informati on: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
