I’ve spent the day out on the water just off a little town called Venice discussing the wisdom of investing in India with an international financier who’s now based in Israel. Being the cautious so-and-so I am, I’m not jumping into India just yet but I’ll be taking a closer look at what the new Indian PM, Narendra Modi, is cooking up for investors over coming weeks.
The conversation was timely as I was scratching my head trying to work out how to play this stock market of ours. And it came to me that maybe we all have to be more diversified in our investments, especially when it comes to overseas exposure.
Now I know our newsletter has been preaching the benefits of investing in foreign markets, with both Charlie Aitken and Paul Rickard making solid cases for why you’d want to invest in foreign companies, foreign funds or foreign ETFs.
To make my case, it seems right to get serious about investing abroad now — if only in a small way to possibly get some alpha returns — so let’s look at my previous communiqués, which warned that selling in May might be a goer this year.
First, we’ll look at the overall market and the S&P/ASX 200 index was at 5956.4 on 1 May and we’re now at 5715.9, so we’re off about 4%.
However, if you were in CBA, what have your losses been? The May high was $87.66 and it’s now at $81.25, so the drop has been 7.3%!
Of course, not all stocks have been belted, with that wonder stock — CSL — up 8% over that time.
Of course, this underlines the value of being diversified into quality companies, but my look at overseas markets also reinforces the view that exposure to foreign markets/companies is worth thinking about.
Since May (when selling and running away would’ve been good if your portfolio matched the Index, and you don’t pay capital gains tax), the S&P 500 in the US is actually up 0.8%, while the FTSE 100 is up 2.3%, despite all their problems!
IVV (the large cap ETF for US companies) is up 2% so there has been a 6% difference in the performance of this investment product compared to our Index.
To be honest, my foreign exposure needs to be bumped up, and given my view that the Oz dollar is more likely to fall rather than rise (if Donald Trump eventually gets his way with US taxes), then buying sooner rather than later might make sense. I reckon if Trump succeeds, the US dollar goes up as the Fed raises interest rates and our rates stay where they are.
As our dollar falls, we get a currency win, but I do have to throw in that a win for Donald could easily push up commodity prices, which then would put a floor under the Oz dollar.
But what if this going slightly down (or virtually nowhere market situation) is a prelude to a big sell-off if Trump fails? Then I’d say the dollar dives, but a lot of the Trump bump we saw after his surprise election win could unwind, so we’d see capital losses on many stocks.
That’s the scenario you have to consider and last night (again in Venice) I caught up with my old mate, the king of charts, Lance Lai of Accountancy Invest, to see what his technical analysis is telling him.
He confessed to being distracted by his holiday but believes the local sell-off was hardly significant and the overseas market movements since May are not sounding alarm bells right now.
He promised to get back to his accurate analysis ASAP!
One US analyst, who I’ve respected since the GFC, is Tony Dwyer of Canaccord Genuity. He thinks US stocks will head higher and looks at the bond market, where flattening yields are telling some commentators that an economic slowdown, or even a recession, is on the cards!
He told CNBC that history says buying any correction or dips makes a lot of sense and this chart shows why:
He says when the bond yield curve drops 100 basis points, based on the spread between the six-month and the 10-year bond, it’s two years before a recession takes out the bull market peak!
He says buying the dips is the smart strategy and has the S&P 500 at 2470 for year’s end and 2720 for the end of 2018.
We’ll deal with 2019 in the future.
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