Three things to watch this week: inflation, OPEC+reaction and insulin stocks
Inflation data is on watch and expected to fall in Australia and the US. But expect smart money to flow into healthcare stocks as job growth is slowing and surplus income is falling. We cover healthcare stocks to maybe jab into your portfolio. Plus, the potential OPEC+ meeting outcomes with stocks to watch given the oil price is in 'oversold' territory'
1- US inflation to fall under the Fed's target. Wow. Australia's inflation to slow. But what's next?
Australia's CPI due Nov. 29, is expected to show CPI (inflation) slowed to 5.2%YoYfrom 5.6% in Sep thanks to lower fuel prices.
- But lingering upward housing rents, insurance and utility bills will keep the RBA on edge. Remember the RBA wants inflation lower before declaring the end to its tightening cycle. A hold on rate hikes next week, is likely at its Dec 5 meeting and the RBA will likely reiterate its ‘tightening cycleto ensure inflation expectations remain contained.
- Also consider the market is expecting the RBA to maybe hike in early next year. So that's stopping property companies jumping for joy, as well as Aussie tech companies etc.
In the US the Fed's preferred inflation gauge is released on Dec. 1 and is expected to show core inflation slowed to 0.2% (from 0.3% prior) and 3.5% on an annual basis. That will be a huge win. Or will it be?
- This reading for the PCE (Personal Consumption Expenditures) index, would be below the Fed's year-end 3.7% estimate and would allow the Fed to keep rates on hold for the end of the year. But, on Nov. 30 we will see evidence of a slowing labor market and slowing economic activity in the personal income and outlays.
- Given hiring is slowing and average weekly earnings are declining, investors need to consider trimming profits from stocks that have done well this year and moving into companies that are likely to benefit in the new cycles ahead. Also remember that earnings reports showed us that consumers are shifting from larger discretionary buys toward to staples.
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2. Portfolio rebalancing is around the corner. Watch health care and staples.
Given the above thinking, we will likely see active investment managers move into high quality companies reduce small-cap exposure after their rally. So, expect fund managers to be moving into high quality mid and large cap stocks, especially those that are ‘undervalued’. We cover why to watch Dexcom and Insult that have started to make waves.
- High quality stocks are companies with high return on equity and good profit margins. So think about tech companies, staples and healthcare. But let's think about undervalued companies. We know healthcare stocks and staples underperformed in the US and Australia in 2023 and they could have a comeback year in 2024.
- Last week we saw healthcare stocks in the US outperform, like wearable insulin infusion business Insulet ($Insulet(PODD.US)$) and Glucose monitoring business Dexcom ($DexCom(DXCM.US)$), with both rose 8%. Both are deemed undervalued by market consensus and are expected to see profit growth of 65% each next year.
- Insulet's wearable insulin pump could 'plump’its revenue growth to 26% next year. The wearable ‘pump is also the first of its kind in the world and its growth is untapped.
- For both businesses, also think of the basics 11% of Americans have diabetes. And the CDC says almost 50% of the population are obese in the USFor the technical traders or those ‘bargain hunters; it looks like Insult ($Insulet(PODD.US)$) is due for a technical rally, with the company moving up of four-year lows. Dexcom ($DexCom(DXCM.US)$) shares meanwhile are also moving up off its recent lows.
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3- All eyes on oil. OPEC’s much awaited meeting Thursday – could send oil up. Or tank its price
The price of oil is now down 21% from this years' high. Here are the facts about oil now, three potential OPEC+ meeting outcomes and the oil stocks you need to watch given oil is in 'oversold' territory.
Firstly - what do we know now? Some non-OPEC producers (US and Brazil) have been increasing and wanting to increase production to benefit their nations income. That has been pressuring prices.
- US inventory is building up. But the strategic petroleum reserve is at 40 year lows. The US produces 13 million barrels per day.
- Plus Brazil has inventory rising. All in all, there is lots of idle oil sitting around.
- Also remember that the US Govt' id they want to ‘fill up’ their reserve in December or January? They previously put in an order for $79 a barrel, but that was not filled. So as oil is at $74.99, do the think the US Govt would want to top up its reserve at these prices? hmmm… I wonder. Also remember Biden previously bragged about buying oil at cheaper prices and selling it higher. Saying it was 'ood for tax payers'. Anyhow. That's something to consider.
Potential OPEC+ meeting outcomes
- Quick recap. OPEC and its 23+ countries control 30% of oil supply. They want the price to be higher so their nations can make more money. Countries like Nigeria want to produce more (so they can make more revenue). But all OPEC decisions must be unanimous. Potential outcome?
- OPEC extends production cuts
- OPEC extends and enhances cuts - meaning makes the production cuts over a longer time horizon, and adds more barrels to the cuts. This scenario is bullish for oil and will put a floor under the price of oil
- OPEC does not make a deal. This is very unlikely. If that happens, it would be every nation for itself, selling its oil to the market
Lastly – consider the technical indicators suggest that oil is now oversold. And if OPEC extends production cuts, oil is likely to whip saw high. Keep an eye on Chevron,$Chevron(CVX.US)$, Occidental Petroleum$Occidental Petroleum(OXY.US)$, Exxon$Exxon Mobil(XOM.US)$, ConocoPhillips $ConocoPhillips(COP.US)$, Diamondback Energy $Diamondback Energy(FANG.US)$ etc.
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