Market memories are short

The 180-degree shift in market positioning has taken a little over a day; the snap back has been strong and a clear reset.

Source: Bloomberg

Monetary policy differentials have been our preferred ‘baseline’ for top-bottom theory before applying the other macro variables and bottom-up analysis.

Markets do have short memories as resetting to the base case central bank divergence means investors can return to the trades that have worked over the past year. From an Australasian-centric point of view, that means sectors and stocks with exposure to a tailwind USD, exposure to industrials (particularly services) and domestic firms with no exposure to cyclicality.

That immediately puts several names back on my radar:

Healthcare stocks have been left for dead over the past two months on the changing top-down landscape. CSL remains a core option with its diversification, the markets it operates in, and the fact over 60% of earnings come from the US and Europe.

Telecommunications have also been left behind as the cyclical sectors drew funds out of the sector in a switch trade. Those firms looking to diversify services remain a core part of my strategy and why TPG is still a very exciting prospect.

Development and construction are good providers. Monetary accommodation is here to stay for the foreseeable future, construction levels have been steadily increasing, and supply in several Asian and Australian cities is still well below demand. James Hardies, Boral and particularly Lend Lease still have high levels of appeal.

The risks to be aware of are yields stocks, REITs and most industrial stocks now trade with yields that are at decade lows. Names such as Mirvac, GPT Duet Spark and IOOF have all seen dividends per shares (DPS) sliding to the ten-year average. If yield is what you seek, the banks are still the most attractive.

China’s two-child policy

China ended its 1979 one-child policy overnight. Bega Cheese and Blackmores could not have timed their strategic joint venture announcement better if they tried. The expected boom in babies in China in the next 18 months will almost perfectly coincide with the launch.

The reaction in the NZD was also unsurprisingly impressive. It jumped initially and has seen an uptrend develop in the US session. Fonterra, A2 and Murray Golburn are all gearing up for an initial jump on the shear excitement from the news.

Ahead of the Australian Open

The ASX 200 is pointing higher this morning, up 16 points to 5250.

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