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SMSF market update: the good and the bad


The market has had the worst start ever to a year and looks to be oversold on a short-term basis.

Markets have started 2016 with a prolonged sell-off due to worries about Asian growth and upward movements in US interest rates. The concerns we are seeing from investors are merely overspill from an anxious finish to 2015: growth and debt issues in Asia, the changing interest rate and currency regime in the US and slowing growth and over-indebted balance sheets in emerging markets. This has taken back Santa’s overly generous Christmas rally that saw shares rally 8% in the last few days of 2015, and left some investors in a state of panic as we begin a new year. We continue, as we have from early 2015, to retain defensive positioning in our portfolios. It is important not to become too pessimistic as volatility like this often produces some great buying opportunities. For now, be safe, patient and defensive.

From a purely Australian perspective we are managing the transition to a post-boom slowdown quite well, particularly in comparison to many other commodity dependant economies, many of whom are now in recession. Our economy is growing reasonably well and generating enough jobs to hold our unemployment levels quite low. However it is important not to get complacent as there are real tests ahead and 2016 promises to be another tough transition year. This year we are still defensively positioned and are on the lookout for second order impacts like falling dividends, government spending cuts and pressure points in property markets.

Some themes for Australian equities in 2016:

This part of the cycle is about positioning in stocks with stronger balance sheets and resilient earnings, as cyclically exposed stocks and even blue chips get cheaper. It is very important to stay calm and objective during these periods of volatility and think about the long-term goals of your portfolio. As always in investing, it is important to have set your positions well in advance of these panics and to be confident holding your positions during these periods of market stress. While equities are probably oversold in the short term, many of the issues behind this volatility have yet to be sufficiently resolved for a sustained rally to re-test the highs of last year. It is during times of stress that many great buying opportunities present themselves, but you must ensure that as an investor you are in the right frame of mind to accept them. Keep some powder dry and look to deploy this cash in times of market dislocation.

Some of the key worries and positives are below.

Worries

Positives

Three tips for SMSF investors

Final thoughts

The Australian economy is slowing somewhat as we move past the mining boom, and investors need to adopt a cautiously optimistic footing. On the stock selection side this means stepping up the focus on balance sheet strength, earnings sustainability and resilient business models. Make no mistake, our fundamentals are waning. Therefore, don’t be surprised if sentiment proves fragile. In recent portfolio changes, we moved up the quality curve and into stocks with stronger balance sheets. For now, be safe, patient and defensive.

About the author
Dermot Ryan, Portfolio Manager – Direct Equities, AMP Capital
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