Bull and bear

One of the more entertaining aspects of market commentary is how superficially plausible diametrically opposite views often can be. Being a bear by temperament, I am inclined to think the market is looking very vulnerable, especially industrials. The impact of the high $A has to have some negative effect on the the non-mining industry base, which accordingly must affect listed stocks. The weakness in the housing market will have roll on effects on the banks. That negative sentiment is expressed by Southern Cross:

I just don’t feel certain at all what comes next, and I am genuinely concerned about what these huge currency moves are trying to tell us. I am also concerned about the very weak feedback I am getting from unlisted industrial Australia in regards to current trading conditions, and on the impact on ALL Australian businesses of the currency.

On that basis, and taking into the implied investor complacency as measure by the VIX, I must recommend a far more conservative portfolio and asset allocation position, particularly as we are in a position to lock in profits from the last 10 months. I’d rather be ahead of the curve and push the profit taking button at the market highs than be chasing the market down if our uncomfortable gut feel proves accurate. The last time we were strategically cautious it did precede an 800pt drop in the ASX200 over 4 months.

Anyhow, I just want to keep this sensible and disciplined. I want to lock in/bank some of the risk profits of the last 10 months and preserve capital for better risk adjusted entry prices.

I am not sure the currency moves are “telling us” anything other than that the $A is a proxy play into China and a way to diversify away from the $US. Its strength has very little to do with the domestic economy. What it does indicate is that Australia is caught in a much bigger game over which it has little control. Meanwhile, Morningstar is arguing we might be at the beginning of a bull market:

If we are in the foothills of the next equity bull market then it will pay to invest a proportion of the portfolio in market-linked, or financial, stocks. Most stocks go up in a bull market but the earnings of many financial stocks are themselves a function of the level and direction of the market.

A brave call, given the exposure of the banks to mortgage debt and their need for offshore funding. But there is an underlying flow of super funds into the industry. Morningstar says the Ripoll, Cooper and Henry Reviews, and the increased focus on super funds’ remuneration and conflicts of interest will compress margins in mass-market super except for groups that use MySuper to drive increased market share, volumes and cost efficiencies. Ageing will also have an effect:

Although Australia’s compulsory superannuation system grows with wages and the workforce, the proportion of total FUMA in equities will decline over time as the baby boomers switch from capital accumulation to drawdowns from more conservative retirement income products. So the system as a whole, led by the majors, is set to become less leveraged to the equity market. This is a structural challenge for the industry because income/conservative funds typically earn lower revenue margins than growth funds/products.

Personally I would look more for a correction before assuming we are at “in the foothills”. A Southern Cross argues, these are uncharted waters for the Australian economy and the risks have to outweigh the potential upside, especially given that a fifth of the All Ords is the banks, which are potentially vulnerable. 

These are very different views, and it is views that make up the sentiment of the market. As ever, share investment is as much a matter of intuition as decoding a puzzle.

Morning Star

Comments

    • I guess we’ll know by how much after this afternoon and after next week when Glenn and Wayne have their say.

  1. MEGA Bubble…why did they pile on more debt in 2008, are we worse off now or better??