3 tips for investing in the current market
Remain calm but to continue to build portfolio defences.
Investment markets have regained their composure after a few tough weeks in August and September, reflecting growing hopes that UK and US interest rates won’t rise for a while longer. The weakness in the Asian outlook continues and this will have flow-on effects on the Australian economy and market. As such, it is prudent to remain calm but to continue to build portfolio defences.
Testing times for Australian fundamentals
Australia has enjoyed a record 25-year expansion since the recession of 1990-91. This has been accompanied by falling interest rates and surging profits, taxes and wages. At this point, we seem to be in the latter stages of an aging bull market and the economy may well be tested in the coming quarters. This means questioning assumptions such as ‘house prices will only go up’, ‘unemployment will stay low’ and ‘credit will be easily available’.
As we move past the mining boom sentiment will be fragile and SMSF investors need to adopt a cautiously-optimistic footing. When it comes to stock selection, this means stepping up the focus on balance sheet strength, earnings sustainability and resilient business models. There are some signs of late-cycle behaviour and a subdued backdrop of profitability across key parts of the broader economy.
Top tips for SMSF investors in the current market
Fortify your defences
So far, domestic re-balancing has gone fairly smoothly, thanks to lower rates. The non-mining economy will struggle to replace the profitable gap left by mining. We are positioned for the continuation of a low-growth, income seeking, and risk-averse world, rather than a sharp rebound. The heightened volatility in August was a worry, but market participants need to keep a cool head and remember that volatility can throw up great opportunities for shrewd investors. We have been using the current rally to lighten our exposure to at-risk sectors, and add to positions with strong balance sheets and resilient business models.
Be careful buying the dip in banks
Retail trading data in Australia suggests some investors have been heavily buying up bank stocks in the recent volatility. While the sector is due a short-term bounce, don’t underestimate the significant structural challenges facing this sector as the Australian economy slows, housing normalises, capital requirements increase and provisioning for bad debts rises from record low levels.
It is important to keep a calm demeanour in the current market and not be panicked into selling out of positions during bouts of volatility. Investors overweight in equities may be looking to right-size their positions now, but it rarely pays off in the long term to make hasty sell-down decisions in times of stress. When approaching investment decisions related to asset allocation and stock selection, it is important to maintain a longer term view.
With Australia’s economic growth losing momentum and China under pressure to manage a structural shift from investment-based growth to consumption, protecting on the downside becomes increasingly important. While many stocks now look cheap on an earnings ratio like price-to-earnings (P/E), the risks from continued weakness mean that SMSF investors should question the earnings and market assumptions that underpin them. Given this, we retain our cautious sector stance, preferring to selectively sift for stocks which are likely to withstand any further stress. This means adding exposure to companies with strong balance sheets, realistic business plans and resilient earnings.
About the author
Dermot Ryan, Portfolio Manager – Direct Equities, AMP Capital