I seldom write about stocks I like on my Switzer Daily website as I leave those thoughts and insights to the Switzer Report. However, I broke with that tradition last week ahead of trade talks in Washington because the breakfast team on Sky News — Laura Jayes and Peter Stefanovic — asked me to pinpoint 10 stocks worth investing in before the trade deal.
So effectively, this is the first chance I’ve had to share my views since I wrote my piece and Donald Trump has delivered what he calls “Phase 1” of the trade deal. And Phase 2 and its negotiations are set to start in three weeks’ time, after the weekend’s agreement is “papered”, as the President put it.
What follows are the straightforward stocks and investments that should do well in the short term as well as the medium term, as I suspect the Trump team construct a credible trade truce to set themselves up for a positive start to the 2020 election campaign.
An economy rebounding helped by a confident stock market not only is a great clarion call ahead of an election but it will hose down the fires that will be pushing for the President to be put on an impeachment bonfire.
Let’s start with big index plays first. I want to be long the US S&P500 Index, with the likes of Professor Jeremy Siegel of the Wharton Business School at the University of Pennsylvania tipping a deal could shoot stocks up 10-20%. I’m happy to buy the likes of IVV from iShares that give me the top 500 stocks in one trade.
And if Wall Street is to spike on a trade deal, history says we play follow the leader. So I want to be long IOZ or STW or A200. These all pile in the top 200 stocks in Australia on the stock market into one trade, so that looks like a sensible play.
But wait there’s one more index play I’d suggest. If there is a trade deal, then China must get a great dividend too. Here the IZZ exchange traded fund gives you large cap Chinese companies in one trade. These include TENCENT, PING AN INSURANCE, CHINA MOBILE, etc.
The chart below of IZZ shows how the price rises on good news and dips on bad.
Up until April, there was a lot of positivity around a trade deal happening and see how IZZ climbed.
OK, it’s time to find individual stocks that will do well out of a trade deal.
The founder of Aitken Investment Management, fund manager Charlie Aitken (who you all read in this Report each week), instantly fired back with Caterpillar, when I asked him for his best trade deal stock. He pointed out this company has big Chinese economy exposure — and the chart above justifies his argument.
Caterpillar’s share price
Julia Lee of Burman Invest thinks a trade deal would mean the markets would “embrace growth stocks” and she likes stocks like Afterpay Touch and Lendlease.
Afterpay is very pricey but the same was said about Amazon and CSL in their time — and look at their respective share prices this week – $US1,732 and $239. Amazon was once a $1.50 stock, while CSL effectively IPO’d at 77 cents!
Michael McCarthy thinks a lot of the growth stocks are very high-priced so he’s looking for stocks that could be the secondary effects of a trade deal leading to no recession and instead a period of growth. He likes the miner South 32 as a potential recipient of higher demand for its resource commodities, if the world is set for growth. Its share price shows how good news about a trade deal around March and April was good for the company and vice versa.
In a similar vein, when the news was positive when the European Central Bank in mid-September put out a stimulus bazooka and the US President talked positively about a trade deal, our market spiked and the financial sector was the big winner. And as the CBA is still regarded as the best bank in the country on a number of measurements, it’s the one I’d expect to do well out of a trade deal.
The chart below was the AFR’s snapshot of the local sectors that did well over the week before last, as trade deal positivity increased.
Note how “materials” did well, which is a nice piece of support for McCarthy’s call on South32.
If you believe the mining sector can do well out of a trade deal, then a mining services company, which has a great reputation (namely Monadelphous Group Ltd or MND) is the one to think about. FNArena, which surveys the expert analysts, says the smarties think this stock has a 16% upside!
My final stock to buy as a beneficiary of the trade deal is the one I put on the stock market — the Switzer Dividend Growth Fund (SWTZ). This fund shouldn’t be so sensitive to growth but it is, and maybe the big name companies it invests in gives this ETF more volatility than I expected.
This is designed to harvest good dividend-paying stocks, which should deliver say a 5-6% income yield plus franking credits. Last year, the net yield was 7.9% and the gross was 11.2%. But that was a huge year for dividends, with many companies getting rid of franking credits before the May 18 election, where Bill Shorten was promising to crack down on these tax gifts, especially to retirees.
This would be a safer kind of play for the more nervous investor, who wants to get income in case the stock market tanks. Remember, dividends don’t collapse like share prices.
So here are the 10 trade deal stock plays:
- IVV (the US stock market).
- IOZ or STW or A200 (the Aussie stock market).
- IZZ (The Chinese stock market).
- Caterpillar (CAT).
- Afterpay (APT).
- Lend Lease (LLC).
- South32 (S32).
- CBA (CBA).
- Monadelphous (MND).
- Switzer Dividend Growth Fund (SWTZ).
Sure, this is a few days late for those who might have been brave enough to buy before the trade deal but that’s not how I invest. Admittedly, I’m already committed to many of these ETF plays, because, as you know, I believed a deal would happen, however, as an investor, I usually want to see my suspicions confirmed and I don’t care if I miss the first leg up.
Missing out on the first market lift is a small price to pay, as once I’m sure my forecasts or predictions are right, I then go in harder than I would have if I was still in guess-mode.
Since Wednesday this portfolio is up 2.3%, with CAT up 8.8% and APT up 4.8%, which shows you that a trade deal is pro-growth — and it’s risk on!
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