Bargains on offer in nervy market

Published in the The Australian, June 2011

As US billionaire Warren Buffett says, the time to be fearful is when others are greedy and the time to be greedy when others are fearful.

With a severe bout of nerves on world stock markets in recent weeks, is now a good time to exploit the fears of others and get back into the market, or at least start looking for some gold amid the dross?

Or it is better to wait until the outlook for the market and individual sectors are clearer?

In Australia, the market has been held back by concerns that the China story may be losing its gloss just a touch, worries about the prolonged weakness of the US economy and nervousness about Europe.

Add to that concern over the impact of the strong Australian dollar on exporters and concerns about interest rate rises by the Reserve Bank.

There is also edginess about federal politics, with a combination of prolonged uncertainty over the impact of the carbon tax and a weak minority government driving with a permanent eye on the 24/7 news cycle.

The good news is that the bellboys have not got back into the market.

The Australian market has fallen about 3 per cent this year, compared with 2.6 per cent recorded for all of last year. This week was a volatile one, as brokers rang their clients to advise them some stocks were a lot cheaper than they had been for some time.

Commonwealth Bank below $50? BHP a touch above $43 when it was $49 in April? And maybe even poor, battered Telstra is finally on the turn? It has already come back from $2.60 in March to $3.

 "I'm almost like a child in a toy shop," says Michael Heffernan of Austock Securities.

"There is so much value around here. There are some very good stocks around that are a lot lower than they were three years ago.

"The economy is not shooting the lights out right now, but the fundamentals are great. World economies are not going backward. Sure, things might get cheaper, but if something looks like it's good value, go and do it and never look back."

Ordinary Australians are being told how wonderful their economy is going, but there is nervousness among retail investors about their personal outlook. Consumers are saving their money, checking out the highest rate for term deposits on online savings accounts. They only spend after looking out for a bargain or seeing if they can buy cheaper on the internet.

They are shell-shocked about the price of petrol and the rising cost of non-traded goods such as electricity.

The combination of a choppy stock market and a deflating property market is also having an effect.

We feel wealthier when markets are booming and housing prices are soaring.

The atmosphere is not exactly fearful, but it is nervous enough, some argue, for investors to be ready for bouts of volatility, as we saw this week, to buy on weakness.

JPMorgan's Australian equities market outlook for June reflects the cautious outlook. It is headed "Remember the Tightening", noting that a rise in Australian interest rates will hit local companies and a rise in Chinese interest rates could affect the big resources outfits.

Its target for the ASX 200 index for June is 4750, up from about 4568 now, and rising to 5000 by the end of the year. The narrow range, it says, is because of the possibility of interest rate tightening in Australia and China. There's no boom, but no market collapse either.

For those with a strong view on the Australian dollar, particularly those who believe it might have topped out, there may also be a play in some ASX stocks that might benefit from a turnaround in the US dollar.

Wealth Within analyst Dale Gilliam said yesterday that the Australian market had an "important band of support between 4500 and 4600 points".

"Taking history into account, investors need to be aware that the way the market unfolds over the next few weeks will be critical in setting direction for the second half of 2011," Gilliam says.

"So far the analysis indicates that the market is likely to find support in June or July before it starts moving back up. However, just as markets can quickly turn, we have also seen how sentiment can deteriorate just as fast."

That might seem to be covering all the bases, but it does indicate there is volatility ahead, which could provide buying opportunities for those wanting to buy more - or select - equities.

As Buffett has also said, he would rather buy a good company at a fair price, than a fair company at a good price.

In other words, the quality of the stock is what is important, particularly for retail investors.

"It's a market for picking the correct stock," says Stuart Palmer of brokerage BBY.

With expectations of a further rise in the price of gold, he likes gold producers with low costs of production, particularly those with mines in emerging nations. He also likes coal and iron ore stocks.

But, he argues, in the current market investors should stick with quality.

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