What's important for a Blue Chip ASX Portfolio?
A recurring theme for the Blue Chip Value Portfolio is balance sheet strength, which we think will be a highlight for the upcoming reporting season this month (most companies' six months to 31 December 2020). Central will be outlook comments and amid the nervousness about future growth, investors will gravitate towards well capitalised companies with strong markets. They don’t get any better than the big banks and global resources.
Two key portfolio foundations
The two key foundations of the BCV Portfolio continues to be overweights in mining and banks. On the bank side are the three that look best value, ANZ Bank (ANZ), Westpac Bank (WBC) and National Australia Bank (NAB). It hurt us in the early part of 2020 but it looks like the economy is starting to turn around and banks are beneficiaries of that, hence their outperformance over the past few months. The market is assuming that they’ll claw back some of the extra bad debt provisioning they made last year, which will boost profits.
At the profit level, I’m referring to the increase in provisioning associated with oneoff hit to earnings relating to COVID-19. Any unwinding is good news for earnings and dividends. But looking at the bigger picture, the news is even better. Last year turned out to be a good opportunity for banks to recoup some of their reputational damage sustained during the 2018 Hayne Royal Commission. They did the right thing by their customers and in years to come shareholders should reap the rewards. It’s no longer okay for governments to be engaged in bank bashing.
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What do ASX investors need to know now?
On the domestic economic front, JobKeeper is ending at the end of March, but we think that now that auctions are back up and running it is showcasing the rebounding housing market, on top of which bank balance sheets are very strong. Of course, our confidence in banks as an investment is underpinned by the outstanding value we can see.
What about Blue Chip stocks in the resource sector?
On the resources front we recently changed our exposure. We removed BHP and replaced with Fortescue Metals (FMG) which is a pure iron ore exposure and we discuss in this issue. Even after you include the recent weakness relating to the cost blowout, this stock has outperformed other resources after we bought the stock when it dipped in October 2020 to close to $16. It’s been over $25 but at current slightly lower levels we remain positive.
More generally, last year highlighted how resilient China’s economy has been to economic shocks. This augurs for resources companies across the board. We remain happy with our holdings, which include Rio Tinto (RIO), South32 (S32) and Alumina (AWC).
The mining sector has been resilient to the pandemic despite moderating world economic growth, which makes it quite defensive. In order for any infrastructure and construction to occur, commodities are necessary. We think the upcoming reporting season will highlight this strength and the fact that they’re one of the sectors that have been looking after shareholders. Like the banks, at the big end of town, this is because they’ve got strong balance sheets.
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Our Blue Chip winners
Our biggest Portfolio decision late last year was our move into undervalued companies in the financial sector that have been in some distress: AMP, Challenger (CGF) and IOOF (IFL).Because we’ve got our big overweights in mining and banks, it’s given us flexibility to take on positions in these higher risk companies, but which also represent outstanding value on our model. Banks/resources give us insurance to invest in high risk/high return stocks.
In the upcoming results we’re looking to see confirmation that the severe distress that they were in is ameliorating. There is some evidence of that happening in AMP with recent interest from a New York private equity fund, which we discussed in BCV Issue 65 (6 November 2020)
We also have small positions in Qantas (QAN), Sydney Airport (SYD) and Transurban (TCL) which have been hit hard by the pandemic as travel related businesses. Domestic travel is returning but obviously these companies will be under stress for some time. We are happy holding on because of the growth as conditions gradually return to normal and they get the benefit of a reduced cost base. Much of the bad news is in the price and our Portfolio utilises these stocks as exposure to industrial cyclical businesses. If you have genuine diversification in your portfolio, buttressed by Blue Chip businesses with strong balance sheets, you are well protected from economic uncertainty.