by Raymond Chan

ASX 200 finished +1.2% at 5,386 points and reached another 5 year high on the back of:

  1. No Tapering: Global equity market rallied on consensus that US Federal Reserve won’t begin tapering until at least March 2014.
  2. US Earning Upgrades: After only 2nd week of US reporting seasons, our Strategist Michael Knox already suggested the US EPS (earning per share) has accelerated in last quarter which will lead to further earning upgrades.
  3. Retail Fund Inflow: Goldman Sachs reported that US retail equity inflow reached 10 year high at US$6.04 billion.
  4. Aussie AGM seasons: most companies provided us with positive outlook commentary

Over next two weeks, all eyes will be on Bank Reporting Seasons:

Here are the timetable for Bank Reporting Seasons: ANZ (FY result on Tuesday), NAB (FY result on Thursday), MQG (1H result on Friday), WBC (FY result on Monday week) and CBA (trading update on Wednesday week). Investors have tendency of buying ahead of bank stocks trading ex dividends.

As you may know, Latte with Ray are running seminars in Sydney, Brisbane, Melbourne and Perth in October and November.

We’ve completed our Sydney, Melbourne and Brisbane roadshows and will travel to Perth next week. The purposes of seminars are not only to meet our media audiences (from TVB, SBS and Sky News), but also gather investor feedback. Here are the most frequent asked questions during our roadshows:

  1. How to buy properties in Self Managed Super Funds (SMSFs)?
  2. Do you think Sydney / Melbourne property prices are overheated?
  3. How to invest for retirement?
  4. What is our view on the Aussie dollar?

Firstly, Latte with Ray understands that there’s only a small portion of SMSF money investing in residential properties. According to Mr Graeme Colley at SPAA (SMSF Professionals’ Association of Australia), he suggests at June 30, property in SMSFs consisted mainly of non-residential property such as commercial property ($58 billion) compared with residential property ($17 billion) out of total of $495 billion invested in this sector. At $17 billion, that’s only 3.4% of all SMSF assets."

Secondly, we need to understand why there’s a sudden surge in residential property demand within SMSFs. Latte with Ray believe the reason is obvious – investors have been scared away from the sharemarket after the GFC. As shown in ASX website (chart 1), the level of direct and indirect ownership has dropped to a 12 year low.

Chart 1: Share Ownership between 2000 and 2012

Thirdly, we are witnessing a synchronized growth in both property and share markets. It’s interesting to note that the flow of retail money into share funds always lags the market performance by one or two quarters. As such, the while ASX 200 has bounced back over 25% from its last October low, plenty of investors are staying on the sideline. Latte with Ray are of the view that this money will gradually move back to shares on any market weakness between now and next March. As such, any correction in the sharemarket could be quite mild (say 3 – 5%).

Last but not least, we always got a few questions on small resource stocks in our past seminars. This time is different – we’ve yet to receive one single question on those stocks. Even if we’ve got questions on resources, the focus is more on the top end of the town - BHP & RIO.

Latte with Ray are of the view that investors should look at resource stocks (even at the smaller end – which is of course more riskier) over next 3 months due to the following reasons:

  1. The 3rd China Communist Party Plenum is fast approaching in November. This forum will outline the national strategic plan over next 5 years in China.
  2. It’s almost gone without notice that iron ore and oil imports are at all-time records while copper imports have regained the strength experienced in late 2011/early 2012. It looks like the strength in imports is being driven by a restocking cycle ahead of an expected pickup in underlying demand as growth in both the domestic and global economies recovers. In the meantime, the strength in imports should keep commodities well bid.
  3. Yield Curve is still bear steepening, this has favoured small cap stocks in the past. This topic was previously discussed in our article on 7th July 2013

As shown in Chart 2, the Resource Sector has been lagging behind the overall market since the beginning of the year. As a starting point, BHP & RIO are both not on demanding multiples and we can find plenty of undervalued resource stocks with weak technical trends (i.e. showing lack of investor interest). This week, we began to see the institutional investors moving into this space with Noble and SK participating in the recapitalisation of COK. All we need is the momentum and catalyst before a big rally in the small resources space.

Chart 2: Material Index (black) vs ASX 200 (blue) - 5 year chart

Source: IRESS

This is a time for knuckling down, putting your tin hats on and being sensible.

Disclaimer – RBS Morgans Limited

This report is provided for general information purposes only and is not intended as an offer to enter into any transaction. This information contained in it is not necessarily complete and its accuracy cannot be guaranteed.  We have prepared this presentation without consideration of the investment objectives, financial situation or particular needs of any individual investor.

Before a client makes an investment decision, a client should, with or without RBS Morgans' assistance, consider whether any advice contained in the presentation is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal recommendation.

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The views expressed here are those of the author and do not necessarily reflect those of RBS Morgans Limited (ABN 49 010 669 726), its related bodies corporate, directors and officers, employees, authorised representatives and agents (“RBSMorgans”). RBS Morgans may publish research on the company/s named here, which will be forwarded on request. While this report is based on information from sources which Raymond Chan considers reliable, its accuracy and completeness cannot be guaranteed.