December 6, 2015
by Rob Zdravevski
It’s been a while since I’ve written a note, mainly because markets have been so boring that there hasn’t been much of anything to say. Since this August, my time has been occupied with reading and thinking rather than making any notable changes to client portfolios, for there are times when doing “nothing” is the correct thing to do.
If you’re wondering what a boring, directionless equities market looks like, observe any of the major indices over the past year and you’ll get a quick idea. Such trendless markets do play a role in each cycle where markets literally pass time before its next trending move.
Sideways markets can also frustrate investors who don’t accept the concept of allowing your investment to “work and mature”, not to mention adding the element of time.
To highlight such uninspiring activity, the total return of following indices (in their local currency) over the past 12 months have been;
ASX 200 1.1%
Hang Seng (4.1%)
Dow Jones 1.8%
FTSE 100 (3.7%)
It seems as if the equity markets urge to rise has been nullified by various global concerns.
It’s not 2007 and I’m bullish:
Many signals, whether they are qualitative (such as geo-political tensions or central bank policy) or quantitative (negative sovereign interest rates and foreign exchange volatility) may suggest danger for global equities. Keep in mind that these observations are looking at the past and present and they disregard what will occur in the next economic cycle or more importantly, the next movement of capital.
Logically, the action and look of todays global equities market does remind me a little of how I observed them in 2007 however, markets and asset prices tend to move where they can do the most damage and presently that calls for higher prices.
I am still bullish on equities.
Although this stance remains measured for it is accompanied by a heightened awareness of when to adjust and shift our asset allocation and the amount of money being exposed.
In other words, I think equities will provide an adequate return on one’s money when compared to the risk being taken when compared to other assets, whilst it’s not the time for the old “set & forget” attitude.
And we are not suggesting that we are going to “trade” the markets as this is not our investing style.
Today I see:
Multi-Year lows in various commodities such as Gold, Oil, Wheat, Coffee, Copper, Shipping Rates & Natural Gas,
Out-of-favour Emerging Markets,
Increased volatility in the FX market,
Negative 2 year debt amongst some European governments,
Rising defaults in U.S. corporate debt and,
Investors who are acutely focused on the short-term.
Commodity prices will stay low for a further 18 months, albeit they are nearing the end of their longer term trend,
The USD continues to strengthen,
Over the long term, the AUD falls further to test the 0.65 region,
In the interim, probability is rising for the AUD to move higher to 0.7850 but needs to break 0.7630 first,
The long term upward trend in the U.S. equity market is still intact,
Look for U.S. bond yields to rise and,
Gold continues to fall, pick a number….$900, then $750…..
But the “macro” only matters when you are actually trading the macro.
In our case, we focus on specific stock selection but unfortunately the macro tends to dominate and it weighs on many investing conversation and future strategy.
I have said many times, that if you watch and learn the credit markets, it will help you with your equities investing.
Today, my analysis of the bond markets tell me that equities will go higher.
I believe that the U.S. bond market is at the beginning of a divergent shift as I look for yields to rise and with that comes the selling of bonds and that extra cash results in major capital flows into the stock market.
There is no reason to own government bonds.
It’s quite amazing that the advance in global equity indices since 2010 has been on low and waning volume. In general, investors have been underweight equities and haven’t generally liked them and which has resulted in little capital has flowed into equities when compared to other asset classes.
Part of my thesis for calling higher equity prices is that I expect a greater flow of capital into equities over the coming year with European markets being a beneficiary, although this doesn’t necessarily mean that the Euro will rise.
Furthermore, bullish sentiment surveys remain at low levels, corporations have bought back huge amounts of stock thus reducing the amount of shares on issue and Mutual Funds cash balances are high.
The US Dollar remains the king of the currencies and should continue to trend higher.
I think there is little reason for global capital to flow into Australian assets and or its dollar.
In fact, the ASX 200 is one a few major indices to be in an intermediate bear trend and on the verge of it becoming stronger.
A bit about us;
In the past year, we have been correct to lighten or exit positions in Australian banks and giant mining conglomerates whilst we initiated holdings in various industrial and cyclical stocks.
The “oil trade” has hurt our client portfolios, however our view is that the decline in the oil price is closer to finding a floor rather than commencing a new, longer, larger downtrend.
Finally, we are quite pleased with the performance our International Portfolios, simply because those markets have offered better opportunities.
I realised that I better place a disclaimer in case somebody acts on the words appearing in this post and tries to sue me, so here it is…..
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