The last five years, yes that’s five years, have been overwhelmingly dominated by global negativity and caution. While many investors have had the courage to accumulate quality assets during this time, cash has continued to pile up in bank deposits, as most have stayed in cash.
Just look at the amazing opportunities that so called long-term thinking boards have missed in our markets. There have been few corporate takeovers pitched to capitalise on weak investor sentiment and low share prices…Why? Because boards are human too and they are heavily biased to a conservative perspective brought on by the GFC. As I wrote last month, there is a need for more companies with an entrepreneurial culture that foster sensible risk taking and future proofing for the long term. Ironically we will probably see more takeovers in the year ahead, as markets go higher and sentiment improves (while value diminishes).
Be warned
Having said all that, there has been a shift and I am writing in order to warn doomsday investors that capital preservation strategies can be as damaging as any other investment strategy [1] when prices become boom-like. Every boom busts, no matter what the asset. There are trillions of dollars of frightened capital that has flocked to seemingly safe investments creating what is now an unsafe environment in assets such as US government bonds, the Australian dollar, Swiss franc, German bunds, Gold and the list goes on.
If you pay too much for even an A-class asset, the outcome will either be a loss in real terms or a prolonged period of under performance. The prices of most of these assets have started to reverse (fall) and, at least in the short term, appear set to continue.
The rotation is on around the world. The slow but grinding global recovery continues and capital is flowing out of conservative parking spots to under-valued, high-quality growth assets such as equities, corporate bonds and property. Fear is ebbing. It’s early days but the smart money is already well into this shift and those left behind may experience some rather painful price moves as capital flows out of doomsday assets and their prices trend back towards fair value (as prices always do). Getting left behind may not be the only consequence for investors parked in safe-haven assets.
Over the last 12 months, we in Australia have seen a bull market for seemingly sustainable yield stocks. The ASX 200 accumulation index rallied over 20%, catching many by surprise, and stocks like TLS (up 30%), CBA (up 26%), WBC (up 25%), WOW (up 15%) led the way as perceived sources of reliable dividends. With the expectation of falling interest rates, investors have chased yield, helping fuel the issuance of billions of dollars of yield-focussed hybrids of varying quality.
Where’s the value?
Our view is that the bull market for yield has led to full value for many stocks in the market, indeed given the earnings outlook some of these stocks have exceeded our valuations. So while there has been a global boom created for disaster scenario assets, we in Australia have seen a yield-chasing phenomenon that may continue into this year but does not generally represent attractive risk/reward investing. We much prefer to be hunting for value where others are not looking. This usually leads to more attractive value.
Stock market bellwethers for our economy and the market in Australia have more recently also had good moves. Macquarie Bank has jumped over 50% in the last six months while BHP Billiton is up over 20%, and even retailers such as JB Hi-Fi and Myer have rallied over 25%.
As usual the market tends to move ahead of the fundamentals, but is usually pretty good at predicting changes in earnings. The market is telling us that the worst is behind us, and interest rates are going lower, but given its move already, the compelling bear market opportunities have also passed.
The wash up of all this is that the compelling value that tends to be prevalent in a period of poor sentiment and fear is now largely absent. Our market is up over 50% from its 2009 lows in an environment where earnings growth is tough to achieve, so it will pay to be careful. The general outlook is positive at this point and the market trend is up. We are staying with the trend, but seeking value propositions that are not dependant on a bull market to make money for our investors and avoiding anything that is being sold purely on yield.
There is an old saying by Raymond DeVoe, Jr: “More money has been lost reaching for yield than at the point of a gun.”
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