Key points

• Until we get certainty from the Fed in terms of the pathway to lift off, expect further volatility, both locally and globally.
• ANZ, Westpac and NAB will pay their full year dividends in October/November so expect some stabilisation/recovery in their share prices ahead of that point.
• The true long-term investor should cheer periods like this because they provide opportunities.

My little daughter said to me at breakfast this morning “you have a great job Dad, you are a fun manager”.

If only I was a fun manager. The good news is that I’ve haven’t been a fund damager this quarter, in what has been a terrible quarter for global and domestic equities.

Thankfully my investment team and I have been able to preserve our unit holders capital and, in September, my fund was actually up, mainly because we have the ability to short index futures to protect portfolios.

Unfortunately, I have to say I forecast more volatility ahead and then hopefully a decent year-end rally.

Fighting the Fed

The biggest problem the world faces remains the inconsistent message coming from the US Federal Reserve. Again last week there were conflicting messages from voting members of the Federal Open Markets Committee (FOMC), who set US interest rates.

Fed Chairman Yellen spoke at length last Thursday about her views on inflation and the likely path to “lift off” later this year. To be fair to Yellen, while it was an hour-long speech, it actually was well argued and somewhat better than her previous attempts at communication that I, and others, have strongly criticised. Thankfully, she didn’t collapse on stage, despite having a momentary wobble due to dehydration. I hate to imagine what markets would have done if she had physically collapsed on stage.

My greatest criticism of the Fed is too many voices speak and muddy the outlook with their personal views. On Monday after Yellen’s speech, New York Fed President William Dudley spoke and said the Fed would “probably” raise cash rates this year. This was then followed by Chicago Fed President Charles Evens arguing aggressively against a rate hike. Both men are voting members of the FOMC and you can all see for yourselves the huge volatility on Wall St that followed.

I think it’s as simple as this – until we get certainty from the Fed in terms of the pathway to lift off, then we can expect further volatility, both locally and globally. That volatility with be exacerbated by high frequency trading and stocks will continue to trade like confetti.

Other factors

Outside of the Fed’s poor leadership of markets that is creating unnecessary uncertainty and associated volatility, there are other issues that have played a role in what has turned into a deep and ugly correction.

The most concerning fundamental development is the tightening of financial conditions. Every indicator of financial conditions has tightened, while forward measures of inflation expectations have collapsed to post GFC lows.

The bond, corporate debt, CDS (credit default swaps), and junk bond markets are painting a somewhat concerning picture of financial conditions and inflation/deflation expectations. Some of this comes down to individual corporate exposures, such as Volkswagen and Glencore causing broader concerns, but those corporate concerns shouldn’t affect the TIPS (Treasury Inflation Protected Securities) breakeven, which has made new post GFC lows.

Similarly, US 10-yr bond yields have dropped to 2.03% and German 10-yr Bunds back to 0.59%. Both those bond yields are indicative of global growth slowing and inflation expectations falling.

Obviously there has also been carnage in emerging market equities and emerging market currencies. Commodities and commodity currencies have collapsed, and indebted resource stocks are now panicking to raise fresh equity at multi-year lows. US biotech tech stocks have plummeted.

Chinese data remains weak and the world remains concerned about what the “real” Chinese GDP growth number is and its composition.

Technical and momentum indicators are also concerning, indicating further weakness and volatility ahead. The VIX has remained above 20 for the last 28 sessions.

Quite frankly, there isn’t much good news around globally and as you would expect after a correction, there are plenty of things to be concerned about.

Don’t give up

In Australia, the S&P/ASX 200 has corrected over 20% from peak to recent low with the “selfie” basket of stocks hit harder than the market itself. No doubt self-managed super funds (SMSF’s) have had a torrid quarter and torrid 2015 year-to-date.

Obviously that brings out all the press critics of SMSFs. My only advice to SMSFs has been consistently to “lose the home bias” in terms of asset allocation. For many years I have recommended shorting the Australian dollar and increasing allocations to offshore equities. My whole approach has been Australia for income, rest of world for growth.

My advice to you all is NOT to give up on Australia for income. NOT NOW, NOT AFTER A 20% to 25% correction in the key Australian large cap fully franked dividend stocks.

If you had all your eggs in one fully franked dividend basket that was an asset allocation mistake, but my view is it is NOT the time to correct that asset allocation mistake.

ANZ, Westpac and NAB will pay their full year dividends in October/November and you’d have to expect some stabilisation/recovery in their share prices ahead of that point. Similarly, Telstra near $5.50 appears grossly oversold to me with no risk to the dividend.

As usual, I would again caution you about buying ANY resource stock for “yield”. That is, and will, remain a BAD idea. The fact BHP Billiton are considering issuing a hybrid security to maintain their progressive dividend pretty much confirms the risk of buying ANY resource stock for “sustainable” dividend yield.

The long game

I think the most sensible advice I can give you all is to remain patient, focus on the medium-term, and ignore the noise. I continue to recommend buying dips (down days) in high quality, high barrier to entry, high ROE, long duration Australian companies with dividend growth.

If you truly are a long-term investor, you should cheer periods like this because they give you opportunities. Yes, there is short-term pain in terms of losses on paper, but they are only losses if you crystalize them. In my opinion, but with particular reference to Australian reliable dividend yield stocks, I do NOT believe this is the time to crystalize losses. In fact, most of you would have received your dividend cheque from CBA today. I’d be looking to put that dividend income to work in the next few weeks (on a down day), particularly given the grossed up prospective yields and the likelihood of further RBA cash rate cuts.

My other piece of advice if you are a truly long-term investor is to DO NOTHING. You could be best served by turning off your iPhone, unsubscribing from the financial press (not Switzer!), deleting all broker research and enjoy the beautiful Australian spring weather. That may just prove the best advice I can give you.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.