Trillions buy a little time
Published in the ASX Newsletter, June 2009
By Tony Featherstone, journalist
Trillions of dollars of government assistance to contain the global financial crisis and stimulate economies have added up to about 15 minutes progress on the investment clock.
ASX Investor Update asked several experts to comment on the investment clock, a widely used indicator for understanding the movement and conditions of finance, property and share markets.
Most experts believe the clock is still between 7 (falling interest rates) and 8 (rising share prices). Where they differ is the amount of time it will take to move between the two.
Alan Kohler is one expert who believes the Australian share market could trade sideways for several years after the bear market ends, with little prospect of significant capital gains.
Others, such as the trading author Alan Hull, believe the market could test or make new lows later this year before staging a sustainable rally. Dale Gillham of Wealth Within believes the bear market is at least half over.
Always remember that there are many different views on the market and that the majority of forecasters have misread the market in the past two years.
What matters most is economic and company fundamentals. On this score there has been some progress in the past quarter and some progress made on the investment clock.
Government actions to contain the global financial crisis appear to be working, although the threat of another leg in the crisis still remains. The rate at which banks lend to each other, for example, has fallen in the past quarter, creating hope that banks will repair their balance sheets and stimulate economic activity by lending more.
Pushing the clock forward slightly have been more so-called "green shoots" in the past quarter as the rate of economic deterioration in some countries declines. To be sure, the global economy is still recessed and it could take another 12 to 18 months at least before Western economies emerge from their funk.
A sharp rally in global share markets since the March lows has also given cause for hope.
Experts interviewed by ASX Investor Update are still taking a defensive approach and generally expect more pain this year before markets stage a more sustainable rally.
Rather than focus on the overall market, ASX Investor Update asked the experts to comment on a particular sector. That is because while part of the investment clock suggests "rising share prices", the reality is that different sectors will rally at different stages in the next upturn.
And there are "clocks" within the investment clock: for example, property consists of many different types of listed and unlisted property at very different stages on the investment clock. The stock ideas mentioned below should not be read as recommendations, but rather an indication of how the experts view different sectors.
Here are the expert views:
Dale Gillham - Chief analyst, author and educator, Wealth Within
Sector: Banks
The business cycle or economic clock is moving forward albeit slowly at the moment with the clock likely to be between 6 and 8 o’clock. In terms of the share market I believe we are at least half way through the current bear market and are now into the second half. If we break down the current bear market into 3 phases, early, middle and late, then I believe we are now in the middle phase having completed the early stage in March 2009. Given this we have definitely moved on in terms of the economic clock, however I believe we are still around 18 months before the clock will finally move to 8 and we see a consistent rise in share prices.
As of writing, the banking sector index has only been up for five or so weeks (the most significant rise since early 2008) although it has been trading sideways for the same time below the resistance level at around the 50 per cent of its all-time high. Provided the index finds support between 3200 and 3500 points, we can expect another run up for the index to around 4250 to 4500 points over the next one or two months. Alternatively, if the index fails to find support at the above levels, we could see it come back to test support from the March 2009 lows.
Statistically the banking sector together with insurance, financials, and oil and gas are the worst performing sectors in both the middle and late stages of a bear market. Given this, not much upside potential is likely to occur in these sectors until the next bull run in approximately 18 months. In terms of the overall market, the next significant low for the sector and the S&P/ ASX 200 index is expected between July and September this year.
From a fundamental perspective, we know that bank revenues often grow in a recession as the public moves money into safe havens. However this growth can be short lived as investors move out of cash prior to the eventual end of the recession for more favourable investments with better growth prospects.
During the last recession, during the 1990’s, international banks retreated from the Australian market although this has not been the case this time. As a result it is unlikely we will see a decrease in competition which would normally result in increased margins for the banks. Consequently, increased revenues are unlikely to be sustainable for the longer term, especially since we have seen increased bankruptcies, bad debts and tighter lending procedures - not to mention more government scrutiny on fees and charges.
In summary, right now all of the banks are trading in a sideways consolidation pattern, however, I believe each of the banks have upside potential of between 10 and 20 per cent from current prices which could occur over the coming weeks. That said if the banks break on the downside, the risk would be in the same order of 10 to 20 per cent, which would weaken the market, and possibly signal the down move into the yearly low.
Allan Hull, Leading author and educator
Sector: Resources
The big mistake investors make is thinking the 'darlings' in the last upturn will lead the market again this time around. The investment clock suggests a uniform movement between asset prices but in my experience this is rarely the case.
Beware going back to sectors where you previously made money in the last boom. Think back to the tech bubble: investors who were seriously wiped out were those who chased tech shares after the bubble burst, believing there were great bargains to be found.
The same could happen with resources. I believe resource shares generally could stay down for a few years, just as they did after the Asian crisis correction in the late 1990s. The global economy is just too weak and commodities demand could remain subdued for some time.
As such, I expect the resources sector to rally later in the cycle - it would be well behind other sectors on the investment clock. When money does return to the market in large amounts, I expect it to be directed to large, boring defensive shares.
Longer term, I like companies that are leveraged to powerful trends, such as the ageing of the population. The healthcare sector still looks very interesting in this regard.
Andrew Doherty - Head of equities, Morningstar
Sector: Retail
We still favour large defensive retailers such as Woolworths, Wesfarmers and Metcash because they have heavy exposure to non-discretionary spending. People are still going to Woolworths and Coles every week to buy food and this sector is not overly competitive. Some liquor shares, again a more defensive sector, also appeal.
When it comes to discretionary retailers, we favour large companies such as David Jones and Harvey Norman, which look more interesting after heavy price falls in the past year. David Jones, for example, is performing well in difficult market conditions. Again, our advice is to stick to the larger, high-quality companies with good yields and strong balance sheets.
Smaller retailers that rely on discretionary consumer spending pose much more risk. Rising unemployment is a big threat to their earnings. They would be well behind larger retailers, such as supermarket companies, on the investment clock. Their time will eventually come, but I expect small and mid-cap retailers to rally much later in the economic cycle.
Greg Hoffman - Head of research, Intelligent Investor
Sector: Deep cyclicals (e.g. building material stocks)
At some point every investor learns an important lesson: "The business is not the stock". The extension of that is "The economy is not the market". And while the investment clock model may hold some appeal for those with a passing interest in economics, it is of little use to investors. First, it is too simplistic. But, more importantly, the sharemarket tends to anticipate the economic future rather than react to the present.
That makes investing in cyclical and economically sensitive sectors such as building materials and discretionary retail, particularly treacherous. At Intelligent Investor, we prefer businesses in these 'whippy' industries to be conservatively financed.
Each cyclical business must be analysed individually. We have recently recommended selected retail companies to our members, although we have only one building materials group on our buy list at the moment (in this case we have uncovered hidden assets that attract us more than the group's building operations).
James Kirby – Editor, Eureka Report
Sector: Healthcare
If it is the case that we are somewhere in the 'depths of depression' on the investment clock - that is between falling interest rates and rising share prices, then before we get a sustainable lift in commodity prices, an area that may continue to be rewarding is healthcare.
Investors look to the healthcare sector for its defensive qualities. And there is evidence that revenues and profits in the sector are more dependable than, say, agriculture, aviation or any other industry exposed to global market volatility.
The key variable in most health share forecasts is not, funnily enough, the health of the nation. Rather it is the disposition of politicians and public servants who control healthcare spending.
On the ASX, our own listed health care sector received an unlikely boost from the Federal Budget, when the government announced $1.5 billion to be spent on public health, but relatively little on public hospital beds.
That's tough for those in public wards but good news for investors in small-to-mid cap private healthcare companies such as Ramsay Health Care and Health scope.
David Rees - Head of research, Jones Lange LaSalle
Sector: Property
Commercial property is probably at 4 on the clock. Commercial property values have been falling for the past 12 months and that may continue for another 12 months. Residential property is probably at six. We expect more price weakness at the top end of the market, but property values at the lower end in the mortgage belt should be reasonably solid with first-home buyers active.
We should see more investors come back into the residential market in the next 12 months. Changes to superannuation relating to the amount people can invest at the lower tax rate, could see negative gearing in property return to favour. In addition, the residential construction outlook remains weak for the next 12 months - so both the supply and demand outlook for residential property is relatively favourable. This could also support residential property prices.
