Equities

Should I be fully invested?

The frantic activities of central banks in recent years shows no signs of abating and yet quantitative easing and falling interest rates have failed to stimulate any economies.

The effect has been to inflate and distort the value of assets worldwide. Future movements on equity markets are now in the hands of investors who have no alternative but to invest in stocks. In the United States, the markets are at record highs. It is interesting that at a time when there is so much economic uncertainty that there has been such little volatility on major equity markets, with the VIX remaining at very low levels.

It seems that it will now take a crisis to bring reality to the market place. Such a crisis could come from:

a.    A banking collapse, with the Italian banks seen as likely candidates. Italian banks alone have USD 400 billion in… Continue reading

Market Top?

The equity market is now looking expensive but it could well continue to go higher. With interest rates continuing to fall, investors in desperation are looking to the equities market. And yet a lot of money is not committed and remains on the sidelines. Will this money now flow in and fuel an already overheated market? It does seem to be a risky time to commit new funds to the market at a time when the policies of central banks have pushed asset values to very high levels and world growth continues to slow.

There will be the tendency for some investors to think that they are missing out and try to chase this market. However, September, a time when there is a higher probability of a market correction is fast approaching and there are emerging issues which could provide the ingredients for a market panic.

With the world political… Continue reading

Is this really a bull market?

It is interesting that the Dow Jones Index and other American markets have gone to new highs. The Australian market is also very buoyant although in our case we are still in a confirmed downtrend so it could be argued that we are seeing a bear market rally rather than a new bull market. If the high of 5428 on the ASX200 is taken out, then this gives some support for a strong uptrend.

It remains to be seen whether this move on the Dow Jones Index is really a bull market move or merely a false breakout. The fact that the Dow Jones Transports Index lags considerably behind the Dow Jones Index suggests that it could be a false breakout.

Investors are desperate for yield and this is the main driver for this market since in the light of historically low bank rates there is just nowhere else to… Continue reading

Brexit and the investor

The unexpected happened and the UK will leave the European Union! World financial markets have been caught completely off guard. The immediate consequences are significant volatility on world markets and big currency fluctuations.

Other consequences can be expected, including:

  • further falls in world economic growth forecasts.
  • a recession for the UK and the European Union.
  • difficulties for Asian markets exporting to Europe.
  • a lower AUD and lower interest rates for Australia
  • falling commodity prices consistent with lower growth.
  • increased political instability in Europe – more opportunities for Putin
  • other EU countries calling for an exit vote

What can investors do?

The volatility will produce buying opportunities but is the current market exuberance warranted? At this stage it is imperative to stay with the investment plan. A world event such as this is an opportunity for the media to give their “expert” opinions but no one knows what the fall out… Continue reading

Sell in May and go away.

This adage is one of the oldest on Wall Street but it had its origins in the UK in the form of “Sell in May, go away, buy again on St. Leger Day”

St. Leger Day is the day on which the oldest and longest classic race of the UK racing season (the St. Leger Stakes) is run. This is traditionally on the second Saturday in September. According to Investopedia “the ‘Sell in May’ effect tends to be particularly strong in European countries and robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. Note that – since 1694!”

In Wall Street “Sell in May and go away” is based on strong historical data. There is persuasive evidence from the United States markets which show that the months of November to April offer significantly higher returns than the months of… Continue reading

Is this a bull market?

It is hard to remember a time when there was so much uncertainty about the markets. There has been real confusion as to market direction and as a result many investors remain on the sidelines with cash. It is interesting that there are many investors who are very bullish on the market and probably an equal number who are adamantly bearish. The market action of last week now favours the bulls, with many major international indices now closing above the 30 EMA on a weekly chart. See for example the DAX index below. Does this suggest that it is time to put more cash into the market? Snap 2015-10-25 at 17.16.22

Economic conditions are such that there seems no chance that the Fed will raise interest rates this year. With very low or negative interest rates, central banks now have no ammunition left and little alternative but to use further quantitative easing to… Continue reading

The bull market and the Shanghai Composite.

Market mood is very bullish at the moment. But bull markets are all about growth. World growth continues to slow and the IMF has now issued yet another downgrade to future world growth. Asset values have been appreciating as a consequence of continued quantitative easing but in the absence of growth, equities appear to be overvalued? So can a bull market continue?

The Australian economy is very dependent on China. The Chinese stock market is less correlated with their national economy than markets of Western nations but it nevertheless provides some real insights into the health of the Chinese economy. The daily chart of the Shanghai Composite below should be of interest to investors. S Comp October

The chart shows two symmetrical triangles which are patterns of uncertainty. The market fell heavily out of the first larger triangle and given the current uncertainties with the Chinese economy this is likely to be… Continue reading

Are CBA, TLS and BHP a buy in a falling market?

In this falling market the prices of some blue chip stocks have fallen further than is justified given the fundamentals of their businesses. Is it a time to buy these stocks when the world economy is weak and the Australian economy is likely to go into recession? There are two factors that investors consider when looking to buy quality stocks which are showing attractive returns in a downturn.

  • Will the dividend be maintained into the future?
  • How much further will the share price fall and will it recover?

To answer these questions it is a matter of assessing each company on its merits. The following table shows the dividends for the current reporting season for 5 companies, with the returns based on share price as of September 4th. Clearly the dividend returns of 8% to 10% per annum are very attractive given the current cash rate of 2%… Continue reading

What to make of China?

Data coming out of China have always been hard to interpret and from an economic viewpoint have little veracity.  For Australian investors there is little doubt that China is the big story and that the Greek issue by contrast is just a diversion. The Chinese equities market has now fallen 30% over a three week period. This market was a bubble, so a market crash was hardly a surprise.

The question now is how far can the Chinese market fall and what are its implications for Australia?  The stock market in China is different to western markets in many respects. The Chinese market has a very high level of retail investors/speculators with only about 17% institutional investors. These figures are very different compared to western economies. These factors along with the known Chinese proclivity for gambling, means that the stock market becomes one huge casino and with margin… Continue reading

The knowns and the unknowns – Objectivity is essential

This is indeed a time of volatility and uncertainty for investors and a time to be objective about investing decisions. Let’s face it, there are some current economic issues that are known, some that have a probability of occurring and some that are completely unknown.   The unknowns are beyond us but as investors we must be able take into account those factors which are known and make allowance for those that do have a probability of occurring. These variables can be factored into our investment plan and determine how we should be investing in this current environment?

The following knowns seem almost certain to continue over the next few years. These include the continuation of low interest rates, very low inflation rates, quantitative easing, high sovereign debt levels and a continuation and escalation of Middle East conflicts.

The following high probability events can be expected to occur over… Continue reading

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