You could sense the shoulders slumping all around town this week with another woeful performance from the Australian equity market. In my view, successful investment is as much about market timing as it is about stock selection.
The amateur psychologist in me has never sensed greater capitulation in the client base and broking community since the peak of global financial crisis contagion three years ago. We are experiencing a total sentiment capitulation that is translating to low trading volumes and the increasing consensus view that there’s no catalyst to break our equity market out of the current malaise.
Investors are depressed.
However, nobody seems to argue with us that value and yield support in Australian equities is very strong. The only argument is about what the catalyst for releasing this value could be. Other than the odd day of short-covering, nobody seems to believe there is any likely catalyst.
A very successful investor once said to me: “no catalyst is the greatest catalyst of all”. That’s when you know you’re buying deep value. However, in a world of daily performance measurement that has driven almost all investors to a day-trading mentality, deep value can remain deep value for a long time.
Before you say: ‘Charlie you’re always an optimist’, think again. It was this firm that told you that you were all too bullish back in April – over 600 points too bullish.
The correction has now played out and people have capitulated at the bottom as known knowns were confirmed. I believe risk is cheap, very cheap. Therefore we recommend people with more than a 24-hour investment horizon add to their portfolios during this capitulation.
The point I’m making is all of the macro reasons for the correction in Australian equities are known knowns. While none of you will agree with me amid the market slump, the right question to be asking yourself from these low share price/high dividend yield and sentiment capitulation levels is: What could go right? You need to ask yourself what the headlines on your iPad will be in three to six months because the ones there today are already priced in.
Similarly, the Reserve Bank Board minutes from Tuesday showed a clear change in language. When inflation drops in the current quarter, watch the RBA cut rates before Christmas. That would be a non-negative for most Australian industrial stocks. I believe we’re at rock bottom in Australian financials, with the Financials Index (XFJ) now trading below the lows of mid-2009.
Westpac Banking Corporation (ASX:WBC): Hold
Keeping with financials, we’ve updated our recommendation on Westpac from reduce to hold. The reduce recommendation has been dead right, but with the share price having pulled back almost 10% since May/June we now think it’s time to hold WBC in portfolios again. While markets are horrible right now, this firm will continue to attempt to be constructive and focused on the medium-term. In terms of incremental productivity and benchmarking against St George Bank, we see an upside of $2 a share (9%) to our price target of $21.70 ahead of their third quarter results on 16 August.
Telstra Corporation (ASX:TLS): Buy
We believe the market is pricing in material uncertainty (eg. the National Broadband Network, operating strategy, and Future Fund overhang), but we’re confident these near-term uncertainties are improving. Furthermore, Vodafone Hutchison Australia’s (ASX:VHA) pain is Telstra’s gain, and VHA’s first half results (and loss of 375,000 customers) suggest there could be some upside to our Telstra mobile estimates. Telstra is due to report their full-year results on 11 August and we retain our ‘buy’ recommendation and $3.45 price target.
Also in the Switzer Super Report:
- The super laws have changed. Do you comply? [1]
- What not to buy – Part 1: size matters [2]
- Why I think this market sell-off is an overreaction [3]
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.