The buy and hold era is over for stocks.
We are grinding through the fifth year of the secular bear stock market that began with the popping in late 2007 of the bubble in Australian stocks from 2003.
For investors, what makes this period different from the last is the order in how you ask your questions.
Instead of first wondering what stocks should I buy? The first question should be how much of my portfolio should be in stocks?
In other words, are you after capital gains or yield?
Because if you want the latter you need to be able to stand high volatility, and if you want the former you have to consider your timing, understand the macro scene and consider risk first, not return.
This market is called The Great Volatility for a reason.
You will find that taking the macro approach, and thinking laterally about risk will make your job of finding the individual stocks a lot easier, particularly when you consider sectors from the view of “is this for yield or capital gain.”
For example, given the deleveraging trend of reluctant Australian consumers and the strength of the Australian dollar, retailers are unlikely to do well on capital gains.
The dividend yield is enticing, however.
Myer (ASX: MYR) is currently trading at 18 per cent fully franked, with David Jones (ASX: DJS) not far behind at 15 per cent, grossed up.
But you have to consider that these are trailing yields – we just don’t know what next year’s dividend will be – will they have to retain more of their profits to reinvent their business model due to their lack of innovation, high rental costs and poor customer service?
Will continued falls in share prices wipe out any return on this spectacular yield?
Or will current negative sentiment reverse on continued easing by the RBA cutting the cash rate? These are factors you cannot work out alone with straight fundamental analysis.
Another example of negative sentiment outweighing a good valuation can be seen with mining stocks, the ASX200’s second-worst sector over the year (the other being gold stocks).
Even though most domestic institutional investors are overweight the big mining companies like BHP Billiton (ASX:BHP) and Rio Tinto (ASX:RIO) they are falling in price because commodity prices are being pushed down by fears of a “hard landing” in China.
(Some of those fears abated with last year’s June quarter GDP figures from the Middle Kingdom.)
Think sideways here and instead of looking at companies reliant upon commodity prices, look at companies that provide services to those miners, like Monadelphous (ASX:MND) or Lycopodium (ASX:LYL).
Both of these not only offer good yields (7 per cent and 6.5 per cent respectively) but their estimates of value are also growing over the next 2 years as the mining capex boom rolls on.
Another sector that used to offer capital gains, but now is the standout in yield are banks. When the credit boom took hold, Australian bank share prices took off, but have now not moved (apart from enormous volatility, which underlies their non-robust business model) for over five years.
And this is likely to be the course for the next five years, as even though earnings growth is likely to be a positive 2-3 per cent for the foreseeable future, increasing risk to banks balance sheets, either from falling house prices or stricter regulatory requirements, could see more earnings retained and lower dividend payout as a result.
Where are the capital gains then? The macro approach can also provide you with positive ideas, and its healthcare where this can pay off. An ageing population that holds voting power so governments increase health care provisions (e.g healthcare costs rose 6 per cent last year according to the consumer price index) along with advancing medical technology are the drivers behind companies like CSL, Sonic Healthcare (ASX: SHL) and Ansell (ASX: ANN).
Analysts and investors may spend a lot of time analysing individual stocks, but the real money is made in working out the macro trends and drivers to properly allocate your portfolio whilst always focusing on the risk to your investment, not just the return.
Twitter: Chris Becker. Chris Becker is an Investment Strategist at Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.