Why it pays to be specific when investing

Published in the Australian Financial Review, February 2014 by Alexandra Cain

In the wake of a more buoyant sharemarket, online broking houses are reporting that investors are starting to shun investments in index-related instruments in favour of stock-specific positions.

The reason, says Chris Weston, institutional trader with CFD provider IG Markets, is that traders want exposure to the rising equities markets, both in Australia and overseas. 

This is in contrast to investor behaviour ­exhibited during and following the financial crisis of 2007-2008, when traders moved into Australian and global indices to access the diversification these instruments deliver. 

It also shielded them from the volatility of a single stock exposure.

So now equities are back in the black, what stocks are people buying?

According to Michael McCarthy, chief market strategist with online ­broker CMC Markets Asia Pacific, six stocks featured throughout 2013 in its top-ten list of equities traded, by volume of trades, by its clients. 

These are: ANZ, Commonwealth Bank of ­Australia, NAB, Westpac, BHP Billiton and Telstra.

“But although the stocks in the top ten have remained largely the same, what we have seen change is which stocks are at the top of the list over this period,” says McCarthy.

Early in 2013 the banks were at the top of the list, but by January 2014, BHP Billiton held the top position, followed by Commonwealth Bank, Telstra and Fortescue Metals Group.

“Investors who wanted good exposure to dividend stocks are now rotating into growth stocks,” says McCarthy. 

But he explains that investors are not selling down holdings in bank stocks that pay good dividends to move into resources stocks whose shares have the potential to increase in value.

Rather, they are committing new money to mining stocks.

Follow the trend

Mr Sterling, a sharemarket ­analyst at private investment company Wealth Within, says traders with experience are looking for strong trending stocks to make a short-term play for profit. 

Trending stocks are those that demonstrate a clear propensity to either increase or decrease in value, in contrast to stocks whose prices remain largely unchanged. 

“This is because trending stocks tend to have long-term moves both up and down. 

This is good from a trading perspective as you’re able to identify strong momentum as the market unfolds in a particular direction. 

Trending stocks tend to be those in growth type industries,” he says, giving electronics retailer JB Hi-Fi as an example.

“The company has done well in revolutionising the retail market with its low cost base and ‘big box’ store design. 

It’s performed well since it listed back in 2003, with the share price unfolding in protracted, steady uptrends and downtrends that are perfect for the experienced trader to profit from.”

Weston says his clients are also showing renewed interest in US equities. 

He cites big global names such as Google, Apple, Twitter and Facebook as companies to which Australian investors want exposure.

“These are brands people know and love every day and people like trading products they know. 

Google in particular is a really innovative company ­people want to profit from and Apple is a two-way trade – people are investing in the stock but also shorting it.” 

Shorting is an investment technique through which traders profit from a drop in the value of a share.

Weston says Japanese stocks have also piqued investor interest. 

“You see people trading Nissan, Toyota and Sony; Nintendo has caught the attention of short sellers.”

Back in Australia, similar to the trends CMC Markets has seen among its clients, IG Markets’ clients also prefer bank stocks. 

“The Australian banks are always favourites with ­clients; but it’s really the top 20 [Australian stocks] that people want to trade,” says Weston.

He also says clients like to trade stocks whose share prices have demonstrated volatility, which gives them the opportunity to trade both long and short. 

One stock in this category is troubled engineering and construction services business Forge Group.

Scott Schuberg, chief executive of Rivkin Securities, agrees index trading is a tough gig for investors. 

Schuberg says since August 2013 the ASX 200 has been trading in a range of 5000 points to 5500 points. 

He says investors are interested in trading the index when it reaches 5100 points. 

But he says at the moment, it’s difficult to find research and analysis to indicate the index will move in a predictable direction.

“So it will have been difficult for those who enjoy the simplicity of an index trade to make money recently,” he explains.

Stock-picker's market

“Often we’ll hear quotes from fund managers such as ‘this is a stock-picker’s market’. 

All that really means is that the market is not projecting a consistent directional trend,” he says.

As a result, investors can’t rely on a continually rising index to secure returns, which prompts some to trade individual stocks, to try to separate good businesses from bad businesses.

This is in contrast to index trading, where an investor is exposed to a large bucket of securities, some of which will be performing well and other will be performing not so well.

“It should always be a stock-picker’s market as far as a fund manager is ­concerned, so the theme of traders returning to individual trade ideas rather than relying on index returns is a healthy one. 

It means the market and its constituents are being priced more ­efficiently,” he says.

With this in mind, Schuberg says it is a logical time for investors and traders look at single stocks, rather than invest in indicies. 

He says over the last 12 months Rivkin has concentrated on individual instruments across multiple asset classes.

“In particular we’ve done very well from US and Japanese equities, as well as local ASX takeover arbitrage opportunities like Warrnambool Cheese & Butter and [mortgage business] RHG Limited. 

These type of trades don’t bounce around with the market on a day-to-day basis.”

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