How to profit from the great Australian decoupling

Advertisement

Morgan Stanley gets it:

Merging three key Australian macro slowdown themes with our quantitative regional MOST stock selection model, we highlight our best stock ideas. We also provide an update on recent factor performance and note a mid-month revival. Our timing model remains positive on momentum.

Crunch time – three themes: Our domestic slowdown thesis is underpinned by a number of domestic economic challenges. Weak income and consumption growth, slowing housing activity,and underlying weakness within the labour market keep the macro outlook for Australia subdued. Weak earnings momentum has re-emerged; the earnings estimate revisions ratio for the ASX 200 is turning negative and is out-of-sync with global estimate revisions which remain positive (Exhibit 1). We highlight three thematic trades in this report:

1. Underweight stocks linked to a weaker consumer (e.g. JBH, AHG, SXL,FLT)

2. Overweight beneficiaries of a falling ATWI (e.g. ANN, COH, ORA, TWE)

3. Overweight defensives in a down market (e.g. SHL, MQA, NST, SPK)

The MOST Stock Selection model Down Under: Within each of the above themes, we look how these stocks rank quantitatively. Our quantitative stock selection model is based on the regional MOST (MOrgan STanley Stock Selection) framework, which utilises value,growth and quality factors specific to the stock’s sector,and enhances the signal with a momentum factor. This model has a reasonable back-tested information ratio of 0.98 since 1995 for Australian stocks (Exhibit 2).

Stock ideas that tick Macro, Quant, and Fundamental boxes: We calculate statistical sensitivities to the above three themes for all stocks within MSCI Australia, then overlay these signals with the quantitative framework,as well as the fundamental analyst views.

Stocks that screen well across all these filters include: ANN, COH, ORA, TWE, RSG, MQA, NST,and SPK for Overweight ideas, and JBH, AHG,FLT,and SXLfor Underweight ideas.

Factor performanceand timing update: Year-to-date, the best performing Australian factors are still related to balance sheet strength (accruals, capex to depreciation,and falling leverage), while value, profitability,and momentum factors have disappointed. However, month-to-date performance to 15 June 2016 reveals some reversal, with good performance in both momentum and value. Based on the Australian factor timing framework, we think the current environment remains favourable for momentum in view of good value spreads and low volatility.

All excellent themes.

Or, you can let us do it for you at the MB Fund and not only get the right allocations at home but profit from markets abroad where there is growth as well. It is launching July 1st with a 70% international equities allocation. Sign up today if you haven’t already:

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.