Key points
- At the worst point this month, the benchmark S&P/ASX 200 was down 7%. There have only been five months in the last 15 years when the S&P/ASX 200 has dropped more than that in a single month.
- If you want income, there is no answer in cash or fixed interest. You have to take a risk in the right equities.
- If we pay too much attention to the index itself we will miss stock-specific opportunities. The index is really just a broad measure of short-term sentiment.
It’s certainly been a very bad month in Australian equities, but I suspect most readers don’t realise just how bad.
At the worst point this month the benchmark S&P/ASX 200 was down 7%. To put that in context, there have only been five months in the last 15 years where the S&P/ASX 200 has dropped more than that in a single month.
The move this month is two standard deviations away from the mean monthly return from the S&P/ASX 200 over the last 15 years.
In recent weeks I had warned readers to “keep their powder dry” and wait for a better buying opportunity under 5400. The S&P/ASX 200 saw a low of 5303 on Tuesday afternoon.
Motion sickness
The speed of this month’s fall has been staggering. It’s been faster and deeper than I forecast and that is why I have been taking advantage of these low prices for my fund this week.
It’s fair to say the S&P/ASX 200 has been hit with the perfect storm of negative events this month, but in reality some will prove positive in the medium-term.
I feel more were “liquidity events” rather than “fundamental events”, and history has told me to take advantage of liquidity events.
The biggest factor hasn’t been China, it’s been the ANZ and CBA capital raisings. There is absolutely no doubt in my mind that the vast bulk of the correction in August has been driven by the bank capital raisings, both directly and indirectly.
Obviously equity raisings have a direct effect on the company raising equity and its peers. That’s why the ASX Banks Index is down 9.3% this month, more than the grossed up prospective annual yield of the sector.
But the scale of the bank raisings and their weightings in the index has an effect on the ENTIRE market. We have seen clear “funding pressure” right across the market but I now expect that funding pressure to ease.
Find opportunities under pressure
Two stocks I bought for my fund that were clearly under “funding pressure” selling were Telstra (TLS) and Goodman Group (GMG). Both are cum final dividends and both, in my opinion, reported solid full-year earnings. I think both stocks look solid on a 13-month prospective, remembering if you buy them today you get the final dividend and the next two dividends, generating a solid 13-month income return if nothing else.
I’ve tried to focus on buying ASX stocks that offer dividend growth or dividend reliability during this pullback. That includes the major banks because I believe the risk to the RBA cash rate remains to the downside and Australian 10-year bond yields are 2.68%. If you want income, there is no answer in cash or fixed interest, you have to take a risk in the right equities.
But where we are now, I see the potential not only for high-dividend streams in the right industrial equities, but also the potential for capital growth.
At the end of the day, while bank capital raisings do cause short-term share price weakness, the ultimate result is stronger banks in terms of capital ratios. That is a good thing. Banks come out the other side of these stronger entities, and that is a point worth remembering.
I was on Peter’s TV show on Monday night [1] and we had a good discussion about markets. While I don’t think the S&P/ASX 200 is going back to 6,000 in a hurry, I remain of the view this is an opportunity to deploy capital in high-quality industrials at the right risk-adjusted entry prices.
I tend not to worry about the index itself, I tend to focus on stocks. It is a market of stocks, not a stock market. If we pay too much attention to the index itself, we will miss stock-specific opportunities. The index is really just a broad measure of short-term sentiment. In reality “index corrections” provide you with stock specific opportunities and that is what I am trying to get through to investors in this period.
Obviously that is what I am doing for my fund too. We came into this period cashed up, we have protected capital, and now it is time to deploy it in the right stocks at the right price.
I want to finish today with exactly the same advice I wrote last week [2]. This advice is probably even more valid than it was last Thursday. There are times in writing investment strategy to repeat yourself. This is one of them.
Still buy in gloom
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.
It’s always darkest before the dawn….
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