Key points
- After the Chinese yuan devaluation, Wall St may be the last domino to fall, and once US equities have experienced an 8 to 10% correction, then the vast bulk of this “risk off” event will be done and it will be safe to deploy cash at slightly lower prices than we see today.
- Low expectation stocks such as Rio, Fairfax, Greencross and JB Hi-Fi actually delivered better than expected earnings and dividends and rallied a touch.
- The ANZ post deal performance shouldn’t put you off taking up CBA rights. The Aitken Investment Management fund has sub-underwritten part of the CBA rights issue and will also look at physically buying some CBA rights, once they start trading on Monday.
Clearly, the surprise Chinese yuan devaluation has triggered a global “risk off” event. I had warned last week that Wall Street in particular looked vulnerable to a correction, but I didn’t think the trigger would be a yuan devaluation.
However, it is always the unexpected that rattles markets the most and this, as far as I can see, is a genuinely unexpected event. It clearly has caught investors and traders off-guard and you can all see the ramifications in markets. About the only place to hide has been US 10yr bonds and the US dollar.
A negative storm?
The Australian equity market damage has been larger due to a high mining and energy weighting and bank capital raisings. A somewhat mixed full year reporting season isn’t helping either. Quite frankly, the ASX200 has faced the perfect negative storm and the outcome has been a -6% fall already this month.
So what are people so worried about? The simple answer is China has entered the competitive currency devaluation wars.
In the medium-term this will be good for Chinese exports and Chinese GDP growth, but in the short-term it causes global market dislocation in anything China facing.
The other problem is this yuan (RMB) devaluation development again makes investors question global growth. That is why bond yields have fallen sharply and commodity prices tanked. The AUD/USD has made a fresh 6-year low to reflect this view.
Beijing has said the devaluation is about supporting exports. If the goal is to boost export competitiveness, it also has further to go. The Chinese yuan is still about 17% stronger against the yen than it was a year ago, 16% stronger than it was versus the euro and 11% stronger than it was versus the Korean won.
PBOC said that there is no economic basis for the yuan’s constant devaluation. While this may be untrue, it likely suggests there is a limit to how much the RMB will be allowed to depreciate. Policymakers go to painstaking lengths to ensure stability. At some point, they will worry that depreciation is destabilising. Is that level 5%, 7% or 10%? Stay tuned.
That means we may well be only in the EARLY stages of a yuan depreciation cycle, and if that proves right then you should expect further falls in risk asset markets and further demand for safe haven assets.
The better opportunities
I don’t like writing that but I did warn last week to keep some firepower dry and wait for a better buying opportunity. I suspect how this will play out from here is Wall Street is the last domino to fall, and once US equities have experienced an 8 to 10% correction, then the vast bulk of this “risk off” event will be done and it will be safe to deploy cash at slightly lower prices than we see today.
Remember, it’s been an unusually long period on Wall Street of low volatility, tight trading ranges, and no correction. I strongly suspect that period is ending, for a reason nobody predicted, and that is how I am positioning my fund.
Back to Australia, and outside of the bank correction and mining/energy stock rout, we have also seen huge price moves in “pretty girls” that have reported slightly lower than expected earnings. When you are priced for perfection you need to deliver perfection, and CSL, Ansell, REA Group, Computershare, Transurban and Cochlear all failed to deliver the required perfection. The negative share price responses were in line with the level of disappointment.
On the other hand, low expectation stocks such as Rio, Fairfax, Greencross, and JB Hi-FI actually delivered better than expected earnings and dividends and rallied a touch. Similarly the Telstra result and dividend looks solid this morning and Telstra remains one of my core portfolio holdings.
Honestly, this is an extremely tricky period both globally and locally. There is very high index and stock specific volatility. We all need to maintain discipline and wait for the right moments to deploy further capital.
Buy in gloom
I was thinking about it this morning and in my first month as a fund manager there has been Greece, Chinese equities meltdown, commodities meltdown, Australian bank meltdown/capital raising and a Chinese currency devaluation with associated ramifications. That’s certainly a baptism of fire!
But we must all remember that the idea is to “buy in gloom”. There may well be some more gloom to come in the next few months, but the hardest thing to do is to actually buy in gloom.
The way I approach periods like this is firstly to have some cash stockpiled, but secondly identify individual stock price levels where I would be happy to buy a given stock. Whether that level is based off valuation, PEG ratio or prospective dividend yield, I do like to pick levels where I’d be happy to add to holdings or initiate a new holding.
I think this approach is useful to individual investors/SMSFs as well. The hard bit is actually buying the stock when it gets to the price level you like. I can guarantee you that when the price reaches the level you have identified you will have second thoughts about buying the stock because at the time the world/markets will seem quite ugly.
Yet you will need to be brave and pull the buy trigger. As I say, it’s hard to do, but it’s the right thing to do for investors with more than a one-day investment horizon.
In the meantime, make sure you take up you your CBA rights. The ONLY question you need to ask yourself about the CBA rights issue is whether you want to buy CBA shares at $71.50. That will turn out to be “free money” just like the NAB rights issue was. Forget the ANZ debacle, that was rushed and mispriced and also included an earnings downgrade. The ANZ post deal performance shouldn’t put you off taking up CBA rights. In fact, what the ANZ debacle did to the sector and CBA itself means the CBA rights issue is effectively a discount to a discount.
I think buying a discount to a discount is a good idea and my fund has sub-underwritten part of the CBA rights issue. We will also look at physically buying some CBA rights once they start trading on Monday.
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