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Firstlinks newsletter - 14 May

Graham Hand  |  14 May 2020Text size  Decrease  Increase  |  
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Morningstar acquired Cuffelinks (Firstlinks) in October 2019. Join 60,000 unique users and receive the Firstlinks weekly editorials and free investment ebooks.

There is a remarkable concentration similarity between the Australian and US stock markets that has delivered poor results for Australians and great results for Americans (and global investors). As the share prices of five Australian banks have tanked, the prices of five US tech companies have surged. Each group now represents 20% of their respective indexes, but the journey has been a disaster for many Australians.

Despite the rapid fall in market value of the Big Five Australian banks, they still comprise 20% of the S&P/ASX200 Index as at 13 May 2020, down from about 30% a few years ago.

Banks table

In contrast, the amazing success of Microsoft, Apple, Amazon, Alphabet and Facebook to become the largest five companies in the US now means they also comprise 20% of the S&P500. Where traditionally the US market was admired for its diversity, an index investment now has a solid exposure to only five companies (chart below is as at 23 April 2020).

SP 500 top 5

The 12-month price changes to 12 May are Microsoft +44%, Apple +58%, Amazon +25%, Alphabet +18% and Facebook +12%. Australian retail investors who have held our banks for their high yields are now suffering as dividends are savaged. In investing, what matters is the future, but can anyone make a convincing case that the prospects of our banks are better than the five US companies? Boosted by these tech giants, the S&P500 has fallen half as much as the S&P/ASX200 in calendar 2020. Thank goodness for CSL.

We start with Howard Marks and his latest update on uncertainty and forecasting during a crisis. For those of you struggling with whether we are in a bear or bull market, he explains why nobody really knows meaningful information about the crisis.

David Walsh shows most of the return from local stocks has traditionally come from dividends, and companies preserving capital will have major ramifications for our market. Then Rudi Filapek-Vandyck says this dividend income focus and reliance was always a poor strategy, as investors should have looked more to share price growth for reliable income.

In his half-yearly Bank Scorecard Report, Hugh Dive summarises the dramatic changes hitting banks, especially loan provisions, and he sees much in their financial accounts which is guesswork at this stage.

Garry Laurence explains how varying performance comes from different sector exposure, and how he is finding global opportunities after the recent sell offs.

It's not all bad news for retail investors. Gemma Dale goes inside the client dealing of nabtrade and suggests many investors had held cash waiting for better buying opportunities. Gemma is also joined by Kate Howitt in a video discussing dividends and capital raisings.

While we are all hearing the latest catch phrase, 'the market is not the economy', Angus Coote says this as a poor explanation for the failure of risk markets (equities and credit) to realise how bad the coming corporate results will be. Crucially, liquidity cannot fix insolvency. Last night's stock falls in the US are a warning.

While also concerned with lesser-quality credits, Brad Dunn is more optimistic that there is a role for investment grade paper in a defensive asset allocation.

The remarkable events in the oil market are explored by Alistair Mills who shows how oil ETFs are managed and how investors can take a view on energy assets. It's better for most people to invest in commodities using funds (with the possible exception of physical gold) rather than futures, as this extraordinary (unrelated) Bloomberg story shows.

Syed Shah usually buys and sells stocks and currencies through his Interactive Brokers account, but he couldn’t resist trying his hand at some oil trading on April 20, the day prices plunged below zero for the first time ever. The day trader, working from his house in a Toronto suburb, figured he couldn’t lose as he spent $2,400 snapping up crude at $3.30 a barrel, and then 50 cents. Then came what looked like the deal of a lifetime: buying 212 futures contracts on West Texas Intermediate for an astonishing penny each.

What he didn’t know was oil’s first trip into negative pricing had broken Interactive Brokers Group Inc. Its software couldn’t cope with that pesky minus sign, even though it was always technically possible—though this was an outlandish idea before the pandemic—for the crude market to go upside down. Crude was actually around negative $3.70 a barrel when Shah’s screen had it at 1 cent. Interactive Brokers never displayed a subzero price to him as oil kept diving to end the day at minus $37.63 a barrel.

At midnight, Shah got the devastating news: he owed Interactive Brokers $9 million. He’d started the day with $77,000 in his account.

“I was in shock,” the 30-year-old said in a phone interview. “I felt like everything was going to be taken from me, all my assets.”

This week's White Paper from Fidelity International looks at the new economic order likely after Covid-19, and the opportunities that will come from the dislocation.

is the editorial director of Morningstar Australia

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