Why look at selling tech & property, & buying low-hanging commodity fruit

Co-written by Market Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong

What’s happening in equites that you need to know?

• The Australian share market (ASX200) rose for the third day, up 0.3% to 7,276 points. If it closes here, it will be the best close since 18^th February. The market is 0.8% below its 200 day average, and if closes above that (7,333 point level), further gains are likely ahead. But, keep in mind, portfolio rebalancing from now to the end of quarter, is likely to take place, where fund managers bring asset allocations back into alignment, meaning commodity darlings that have gone up the most this year, are likely to see some profit taking/selling, and some managers could also be forced to top up (buy) downward facing tech stocks (given tech is down the most this quarter as its margins will be squeezed as interest rates rise). Here’s an example; Tech stocks like Zip (Z1P) are down the most from Jan to Mar, down 61%, but this week Zip’s share are up 10%. What are we saying here? Be mindful of end of quarter disillusioned gains, likely to be short lived. Remember earnings GROWTH drives share price growth so you should consider companies in growth industries, that are growing their market share and earnings. So if you see profit taking/selling, in commodity stocks, so you could have your chance to buy companies like Whitehaven Coal (WHC) and Woodside (WPL) that are both trading up 50% this quarter, and operate on low Price to Earnings ratios, meaning they are ‘cheaper’ to buy in comparison to how much ‘earnings’ they make/pay. These are just examples. We reiterate we are bullish on commodities and logistics. So you could pick up some low hanging fruit end of quarter.

• In Asia, Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) retraced 1.5% and 0.4% respectively after the massive surges in the last two sessions.  Hang Seng TECH Index (HSTECH.I) was down almost 4%.  China Telecom (00728) rose more than 2% after reporting inline FY2021 results and raising dividend payout ratio to 60% from 40%.  CK Hutchison (00001) and CK Asset Holdings (01113) were up more than 3% after reporting 2021 results.  The Medicines Patent Pool (MPP) announced 35 drug makers globally had entered into agreement with MPP to manufacture generic versions of Pfizer’s oral COVID-19 treatment for supply in 95 low-and middle-income countries.  Five Chinese drug makers are on the list, including listed companies Shanghai Fosun (600196), Zhejiang Huahai (600521), Apeloa (000739), and  Zhejiang Jiuzhou (603456). In Singapore, the Straits Times Index (STI)  was little changed. February Non-oil exports came in at +9.5% yoy, below market expectation (+16.5%) and January (+17.6%).  Gold export growth dropped 72% YoY and electronics export growth decelerated to +11.6% YoY from last month’s +14%. Pharmaceuticals exports rebounded to +39.5% YoY.  

• In the US, as we predicted yesterday, commodity stocks stole the show and rose the most, with Devon Energy,O ccidental Petroleum the best performers, rising 10% overnight. The reason we predicated commodities would outperform is because China announced supportive policies and secondly commodities were supported by the falling US dollar. Commodities are in US dollars, they look ‘cheaper’ when the US dollar falls. On Friday in the US, the S&P 500 (US500.I) and Nasdaq 100 (USNAS100.I), I’d be watching United Airlines, American Airlines,  and Delta Air, as all their shares are up 16-18% each and are likely to fall given the oil price is back at $105.

What you need to consider

• China’s Xi Jinping hosted a meeting of the Central Committee of the Chinese Communist Party’s Politburo on containment of the spread of COVID-19 yesterday.  The key takeaway from the press release was Xi’s remarks that “more effective measures should be taken to achieve maximum effect in prevention and control with minimum cost, and to reduce the impact on socioeconomic development as much as possible”.   Immediately last night, Shenzhen announced that economic activities and public transportation will resume in 5 out of 10 regions of the city from today Friday March 18.  Another manufacturing hub, Dongguan, also announced last night that the city will resume all public transportation starting today.  This is a positive development but further spread of COVID cases remains a significant potential drag to the Chinese economy in 2022. 

• Chinese property names continued be find support from Vice Premier Liu He’s recent supportive comments as well as other Chinese officials’ pledge to support quality property developers to acquire projects from distressed developers and reiterate that there would be no property tax imposed this year. 

• China’s President Xi and U.S. President Biden are having a call this evening to discuss about current issues, including Russia-Ukraine. 

Trading ideas

• Consider selling or shorting the property market. It’s not just the cost of chicken, beef, oil and bread that are rising. But so too is Lumbar. And it’s taking the heat out of the hot property growth market, House prices in Sydney rose 27% in 2021 and are predicted to fall this year and next from rising global lumbar prices and rising interest rates (excluding in China). Plus, Australia’s debt-to-income ratio climbed to 185%. So as rates, mortgage repayments rise, and cost of living goes up….consumption will go down… and property demand will slow. So expect property prices to fall, and listed property to fall. The property index on Australia, tracked by a number of ETFs looks toppy and is likely to pull back from a technical perspective too. So if you are in property you could sell, reduce your holdings. If you are not, then you could considers shorting the listed property sector, on the ASX tracked by ETFs like; Vanguard Australian Property Securities Index ETF (VAP), and the SPDR S&P ASX200 Listed Property Fund (SLF), or the VanEck Property EFT (MVA) for example.

• Consider reducing Australian tech stock holdings. As mentioned above, Australian tech stocks are likely to continue to experience a short lived rally. It could be worthwhile taking advantage of the likely higher highs in tech stocks, and taking some profits and pivoting out of tech and topping up/buying more banking stocks, insurance companies, commodities and logistics, ahead of the Reserve Bank of Australia rising rates in Australia.

• After the dramatic melt-up in Asian stocks yesterday and the day before, Chinese Internet stocks may be ripe for retracement.  It may be worthwhile for investors to turn to look for opportunities in some defensive high dividend stocks which have stable business and cash flows. 

Earnings to watch

• Australia   Mar 24: Premier Investments (PMV) Brickworks (BKW), Gold Road Resources (GOR)
  

• Hong Kong & mainland China Mar 18: China Merchants Bank (03968), China Molybdenum (03993), Ping An Insurance (02318), Sunac Services (01516)

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