I’m calling an end to the bear market

Chief Investment Officer and founder of Aitken Investment Management
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The five-year S&P/ASX200 chart’s downtrend from its 2007 highs has BROKEN. The five-year bear market is over (at least in my head).

I believe the market will test the near-term technical target of 4,500 followed by 4,800 over the medium term. This is a great chart.

We need resource stocks, led by BHP Billiton (BHP), to recover and lead the index, and the one-year chart of the ASX100 Resources Index (XTR) is showing a bottoming pattern.

All this means is that if you are bullish, like me, you need to be heavily overweight cheap large-cap Australian resource stocks because they will lead the index recovery from here.

It is interesting the feedback I get when I make a contrarian call. This call has been polarising. Even the people who want it to be right don’t think it will be! I haven’t had a single reply completely agreeing with my view, which is actually a good thing.

Too early?

The unanimous feedback on my call is ‘too early’. Interestingly, nobody seems to argue that there is deep contrarian value in leading Australian cyclical equities, or that the Australian economy is improving (as the Reserve Bank confirmed this week), or that Australian earnings are bottoming, or that Australian residential property prices are bottoming, or that 99% of Australians are servicing their mortgages, or that bank bad debts are bottoming, or retail sales are bottoming, or dividends are sustainable, or that hybrids are great for the equity of the issuer, or that a change of Federal Government will be good for sentiment and confidence etc. etc. They simply believe I’m too early in my timing. This is a classic consensus response to the ‘grow on scepticism’ phase of a market turning point. Markets always turn ahead of the consensus view.

The very last thing I want to be is just another useless market commentator who predicts the present. I’ll leave that to others. Similarly, what use is a broker who urges you to act after the event? You will never get certainty and deep value contrarian investment opportunities together; that’s all I know.

So what else am I looking at to justify my bullish call on Australian equities?

Risk appetite is growing

Australian 10-year bond yields have bottomed and are headed back to 3.70%. As bond yields continue to rise, so too will Australian equities, but led by cyclicals, financials and growth stocks, not the pure defensives. The ‘bubble’ in safety will continue to unwind and there will also be asset allocation from domestic bonds to domestic equities in the second half of this year.

I am also hugely interested in Australian post full-year results price action. I have a view this reporting season that ‘low expectation’ stocks will outperform ‘great expectations’ stocks on confirmation of earnings. The low expectation stocks have very low hurdles to jump, while the great expectations stocks have fences as high as those in the Olympic show jumping!

For ‘great expectations’ stocks to rally further, they need to deliver something exceptional that leads to further earnings upgrades. Low expectations stocks just need to show up. I also believe if I’m right about broader investor risk tolerance increasing, that the reporting season will be an excuse to rotate to higher risk laggards.

Bottom line

I can’t stress enough how different my view is to other domestic equity strategists who continue to recommend being parked in ‘earnings certainty’ stocks. My view is to be very careful in the ‘great expectations’ stocks and aggressive in the ‘low expectations’ stocks. Share prices were already onto the ‘haves’ and ‘have nots’. Now that reverses on confirmation.

Just remember, you will never overtake anyone by driving in the same lane. I think I am driving on my own lane on my own freeway at the moment.

Top five stocks

My top-five Australian mega cap candidates for the ‘buy-the-fact/short-cover the fact’ response to full-year 2012 earnings and dividends are:

  1. AMP (AMP)
  2. BHP Billiton (BHP)
  3. National Australia Bank (NAB)
  4. Newcrest Mining (NCM)
  5. Woodside Petroleum (WPL)

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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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