The financial markets have be in turmoil since the onset of Covid-19. It looks like the bull market that started after the GFC is over and the investment thesis for some of our holding has gone out of the window.
Investment Portfolio Highlights
Previously we constructed our own portfolio with a focus on a mix of strong dividend shares and growth companies where there is a clear path to expanding revenues, earnings and dividends.
We have since rebalance our focus towards more income driven and capital protection strategies to ride out the volatile market and even considering some offshore exposure a diversification tool.
How does ASX compare with other global markets?
In bull markets, returns across markets correlate strongly. However in bear markets the markets with better fundamentals will outperform those which the risks investors ignored in the good times becomes important again.
The table below compares the return of the ASX 200 and a suite of global benchmarks. The standout performer has been the Nasdaq which is dominated by technology companies, the one sector Australia market has always been underweight.
|Index||YTD||6 Month||1 Year|
This shows that it pays to have offshore exposure since the local market is heavily weighted towards the mining and financial sectors. We expect Australian equities to underperform going forward given the weakness in local property markets will drag the bank stocks.
We have scoured the ASX for ideas which can best withstand expected volatility going forward until at least a vaccine is widely available where we can return to some sense of normality of the pre-Coivd world
Key disclosure: stocks and ETFs listed below does not take into account individuals own risk parameters and are not recommendations. The list below are sample of our ideas in our investment portfolio which can change overtime.
Top Australian Shares to Buy
The list below are our top 4 best shares ideas.
Origin – We still like Origin as it provides exposure to the long term secular trend of China moving towards cleaner energy. China’s demand for clean gas and shift away from Coal has led to it being the world’s largest Gas importer even post-Covid. The stock trades off changes in the oil price in the short term but in the long run, the key driver of value will be the growth of LNG production.
This idea plays into our income and capital preservation theme as the other half of the business is Origin Energy, one of Australia’s largest utility. Utilities is a regulated industry where the returns are set by the regulator. Therefore it the utility business provides a stability which differentiate it self from owning a pure exploration and production company.
BHP / Rio Tinto – both miners provides diversified global commodity exposure. Instead of trying to pick pure commodity plays (copper, nickel or zinc etc). We always considered diversified approach always pays off on a risk adjusted basis.
The trophy within these two companies has always been the iron mines in the Pilbara as they are some of the lowest cost to produce iron ore in the world with the blend from Pillbra trading at a premium to the benchmark. It also has a large degree of Copper exposure which we see favorable fundamentals in the medium term. Overall the balance sheet looking good with strong cash flow.
As always the key risk being China and during good times the need to maintain cost discipline going forward as commodity prices bounce back.
Woolworths – One of the most defensive business (hence cashflow) in these times. It was a laggard in our portfolio for a long time as the business struggled after being under invested for a number of years. The new CEO implemented much needed changes in turning around comparable same store sales.
We are clearly struggling in finding ideas to add our portfolio even after one of the fastest global market sell off ever. The market has recovered but we still think there will be pain ahead so will be keeping our powder dry.
As we wrote in detail in our Covid-19 risk to real estate post we think the greatest risk for the Australian economy will be the rise in unemployment and subsequent impact on the property sector. The ideas above are what we consider core portfolio and will keep an eye on the stocks on our watchlist further below and enter at a better price.
Wesfarmers – Wesfarmers is Australia’s largest listed conglomerate and owns some of the most recognizable household brands such as Bunnings, Kmart and Officeworks. Aside from retail exposure, it has a strong industrials business with a focus on chemical, energy and fertilisers.
We like Wesfarmers predominantly due to its ownership of Bunnings which is the jewel in the crown and a cash cow for the foreseeable future. In addition to organic source of growth from it stable of businesses Wesfarmers is not shy to enter into new markets through acquiring businesses. After all of its most successful investments like Coles was acquired although its timing was not great at just before the GFC.
After successfully existing its Coles position, the group balance sheet is cash up and derisked making it perfect candidate to be aggressively taking advantage of falls in the values of the companies on its shopping list. The management has a strong history of delivering shareholder returns and stewart of capital and therefore is trusted to deploy capital in this market.
ETFs will reduce portfolio risk
We think having some exchange traded funds can be beneficial for the overall portfolio as each fund typically tracks its own portfolio of stocks. So on a look through basis, an ETF in your portfolio can be an easy diversification tool.
The added benefit is that the ETF will be tracking a seperate market to Australia so again all your eggs are not in one basket.
One interesting idea is owning some China Index Fund. It looks like the China has avoided the worst impact of the first wave of Covid-19. We think it will do relatively well in the medium term even as the US market has recovered the fastest. But the slowdown will be prolonged as it increasingly look like the reopening is too soon when the infection rate has not been reduced is a risky strategy.
Australia Share Watchlist
These are the ideas we are keeping an eye on.
NextDC – Benefit from shift to cloud computing and move IT spending to capital light structure but increasingly look like we missed the boat.
NAB/WBC/CBA/ANZ – If the market continue to sell of the banks we would look to build a position. We are cautious on the banking sector until the loan losses have shown up and the market capitulate on the selling.
Australian Real Estate – We like real estate in general either commercial or residential but just not at this point in time. We feel it is too early as the sector performance lags the rest of the economy. The market has been effectively frozen and will take time until price discovery comes back. We will be keeping an eye on the australian property trust in the meantime.