Are we in a bear rally and are there opportunities?
We have had a number of questions around how to best position, if we are in a bear rally and how to provide a downside cushion and upside participation from here and the stocks that look attractive with this backdrop?
Savita Subramanian, BofA Securities head of U.S. equity and quantitative strategy wrote in a note to clients on Monday that July’s S&P 500 gains marked the second bear market rally of more than 10% this year.
“We view this as a bear market rally, which is common, occurring 1.5 times on avg. per bear market since 1929,” Subramanian said. Aug. and Sept. are traditionally weak months for stocks, the strategist added and maintained the firm’s 3600 price target for the S&P 500.
Although, it appears that inflation may have peaked in the US.
The Shanghai Shipping containerized freight index (left) which is often used as a leading indicator continues to fall as does food prices (right ).
Against this backdrop, some stocks are starting to look cheap with the price to forward earnings dropping in the US.
In Australia, the RBA thinks that inflation still has a way to go and sees it peaking later this year.
In their announcement this afternoon (see link below) they said that “inflation in Australian is the highest it has been since the early 1990s”.
They went on to say that “ The Board expects to take further steps in the process of normalizing monetary conditions over the months ahead…..The Board is committed to doing what is necessary to ensure that inflation in Australian returns to target over time”.
Click RBA statement for more information.
How do you position a portfolio with this background?
The normal rules apply, quality stocks and diversification.
In this environment we think its important as part of your portfolio to have some stocks that can pass on costs or have reliable revenue streams regardless of the economic backdrop.
Some stocks to consider
Woolworths is currently testing resistance and Coles is on the cusp of all times high.
This doesn’t mean that they cant go higher.
Woolworths would be our pick and certainly has some room to get back to the 12 month high as shown in the chart below
CSL is a quality company and even though it has not been immune from the broader market selloff, particularly as the Growth style has succumbed to de-rating, it has roughly performed comparably to Core indexes.
CSL has a number of near and longer term catalysts as to why you should own the stock, combined with the fact you are buying the healthcare sector at the appropriate part of the cycle.
CSL plasma has a number of near-term catalysts:
- The messaging on plasma collection trends from competitor channel checks, pricing, donor fees, and innovation all point to likely revenue upside versus Citi and consensus. Plasma collections in US +20% ytd and accelerating (+24% past month)
- With plasma collections now back to pre-pandemic levels, Citi expect the market to shift its focus to the strong underlying plasma product demand. This should lead to strength in the CSL share price.
- Haemonetics hosted its 2022 analyst day, they also reminded investors that plasma donations tend to tick up when economy ticks down.
- The accretive Vifor acquisition should provide an EPS kicker
Results from CSL competitors Grifols (June HY) and Takeda (June Q) show continued improvement overall in the operating environment for the plasma industry – this is as CITI’s anticipated and supportive of our CSL forecasts.
The key points from the results were:
1) Demand is very strong, and prices are up mid-single digit, showcasing the pricing power of plasma companies;
2) Plasma collections are now well above pre-covid levels;
3) Plasma donor fees are coming down, helping margins.
CITI expect the settlement of the Vifor deal, and a positive outlook on plasma collection at the FY22 result will continue to see the share price outperform over the next 12 months and have it at a buy and price target of $345.
Is gold a good inflation hedge?
Gold is traditionally the hedge against inflation. Prices of the yellow metal rally during times of high inflation. But that correlation has broken down in recent years.
Although it still is a cushion to fall back upon during uncertainty and turmoil.
It has lost a bit of its shine over the last few months and either a gold miner such as Newcrest or an ETF such as GOLD or GDX may be worth considering as part of a portfolio
Importantly, every portfolio is different and we encourage you to contact your broker.
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