When confusion reigns

Monday, 15 July 2019
Melbourne, Australia
By Murray Dawes

As interest rates plummet and equity markets march higher due to the search for yield while economic indicators are rapidly softening, the task of making money trading stocks is becoming increasingly difficult.

Do you really want to buy the banks right now for yield alone, when the property market is still looking wobbly and the yield curve is flatter than a pancake? It may make sense in the short term while everyone else is doing the same thing, but what happens when the music stops?

China just reported some key economic numbers today and their GDP is at its worst level in 27 years at 6.2%. Thankfully, Industrial Production and retail sales figures beat expectations. Industrial Production grew 6.3% in June, but May’s figure was a 17 year low. Retail sales saw 9.8% growth which beat expectations of 8.3%, so the news wasn’t all bad and the ASX 200 bounced after the news was released.

It’s quite clear China is shifting to a new lower growth era after decades of off the charts growth. If they can continue to grow at 6%, there will still be plenty of money to be made by our resource companies. But China has created immense amounts of debt to keep things afloat. Can they keep it up without blowing a gasket?

But first, let’s take a look at the markets…

Markets

The S&P 500 continues to hold above 3,000 without any signs of weakness. A failure below 2,950 in the short term would change the short term picture but until then the rally should continue.

Gold is holding above US$1,400 at US$1,413 and WTI crude oil is treading water around $60.00.

Asian markets appear to have held up well in the face of the Chinese data with the Hang Seng holding firm at 28,523 and the Nikkei slightly up at 21,622.

The big news has been in the crypto sector with bitcoin coming under the pump, falling below US$10,000 earlier in the day but managing to claw its way back above it to US$10,159, at time of writing.

Iron Ore is holding near recent highs around $120, so the strong rally is showing no signs of weakening yet.

The distortion in the iron ore markets as a result of the problems experienced by Vale have put a rocket under our key resource company stock prices. But surely most of that is priced in now, so is economic growth going to sustain prices going forward? Not by the looks of the data we have seen released over the past six months. That’s why the central bankers have fallen over themselves to undo years of effort in trying to normalise rates and have ensured super low rates for as far as the eye can see.

Gold is of course the main beneficiary of such a situation because the opportunity cost of holding gold in a near zero interest rate environment is so low. If you’d like to find out more, then check out editor of Crisis & Opportunity, Greg Canavan’s special report here, which gives details on the five best ways to take advantage of the global gold bull.

But I am not so sure it makes sense to be piling into stocks at all-time highs when world-wide growth is stalling. But that doesn’t mean stocks aren’t about to head a lot higher.

The S&P 500 is at all-time highs and is not showing any signs of slowing down. You would be mad to be shorting it prior to a confirmed reversal. I think we may even be on the verge of a melt up rally.  Not due to the economic situation which looks soggy, at best. But due to the fact the Fed has finally shown their hand completely and have no intention of normalising rates.

If the above analysis sounds a bit confusing. That’s my point. The current situation is confounding.

The economist in me says to tread very carefully, but the technical analyst is saying that I may need to buy it with my ears pinned back if the rally gathers steam from here.

My current method for dealing with the above confusion is to zero in on companies that are growing under their own steam. I want to find companies that are in interesting sectors doing interesting things. Who cares what the indices are doing if you find a company growing at a rate of knots in a sector that will see huge growth over the next 5–10 years?

So my attention has been drawn to the small to midcap sector and the more time I spend researching companies, the more excited I get about the prospects of some of them.

I will throw out a few names of small companies that you may not have heard of before that you may want to put in your watchlist going forward.

Frontier Digital Ventures Ltd [ASX:FDV] is investing in emerging markets internet classifieds sites. It is run by Shaun Di Gregorio, who has plenty of runs on the board. He was General Manager at REA Group for eight years and then went on to run iProperty Group which he grew into a US$600 million business. They have already had a big win with Zameen.com, which is a site in Pakistan growing like the clappers. Most of their current market cap is accounted for with Zameen alone, but they have many other investments that could follow the same path as Zameen in time.

Medical Developments International Ltd [ASX:MVP] is taking on the world with their green whistle. You may have seen it on Bondi Rescue whenever anyone gets into trouble. It is a non-opioid pain reliever that is used by our ambos. If they can crack into the US market over the next few years, they should go gangbusters. They are slowly rolling out the product across many different markets and their share price is certainly looking strong.

8 Common Ltd [ASX:8CO] is a microcap ($25m MC) that has just leapt from a couple of cents to over 20 cents in the last few months on the back of promising numbers. The company’s blurb describes them as a fintech group and their ‘core product expense8 delivers Travel & Expense Management (TEM) and Card Application & Management to large enterprises including Woolworths, Broadcast Australia, Amcor and State and Federal government agencies including the Federal Department of the Prime Minister and Cabinet and the NSW Department of Education’. Not a bad bunch of clients. Sticky recurring revenue. Interesting.

I am not giving you any recommendations to buy these stocks because I don’t even have confirmed buy signals in them yet. I just wanted to make the point that there are many companies out there doing some pretty interesting things. They will live and die on their effort alone and won’t be too affected by the ups and downs associated with the overall market.

Regards,
Murray