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Dubai: "Remember, bears don't own shares," says John Goodlad, investment adviser at Hartleys. Not advice directed at Animal Planet lovers but investors enquiring on Australian capital markets.
Like everywhere else Australian equity markets are experiencing a bear grip. With the All-Ordinaries looking less than ordinary (and below other developed markets) at 20 per cent below its 2007 high, the Aussie equity market is clearly bearish, leading to the query: how much can a Koala bear?
Whilst the Koala is a cuddly creature, bear markets are potentially nasty, dangerous beasts, and, when protracted, they are a serious threat to your wealth. Reminding Goodlad of the 1988 faux pas of the Minister of Tourism, John Brown, pilloried by the public for calling the Koala a "piddling, stinking creature that wees on you". The subsequent furore leading to a humiliating public apology.
After 16 years of consistent economic growth, where does your broker stand in the bear-wrestling experience stakes? Those whose practices include international exposure probably rank best. They will have had a few other bear markets to grapple with over the last 16. For Aussie "domestic only" experience you need to be looking at the out-of-practice older generation; the fear and intimidation is most likely to be felt with the newer generation of domestic stock pickers. There is nothing like a crisis to sharpen the saw.
Banking index
Goodlad has the advantage of both grey hair and an Aussie-bias international practice. So, how big and tough is this bear? "The banking index is down by over 40 per cent even though they are detached from sub-prime issues and other areas of credit meltdown" says Goodlad implying that the perception of bear sentiment is fairly well entrenched.
Other sectors and traditional back-bones of conservative portfolios: Listed Property Trusts, diversified financials, and insurers have also been "beaten up" as the markets aversion to debt is translated into major sell-downs. In short, this is a series of negative systemic issues gripping the entire market.
So how does the experienced stock picker handle this market, and what does the future hold?
"As long as fear is stalking the markets the current volatility is set to continue. Some argue the Aussie market has found a floor level at around 5,200. I would not be surprised to see another down leg at which time the values becomes compelling. The market is already trading at well below its long term average P/E of 15 times - and selected stocks and sectors may be even starting to bounce" says Goodlad, implying that the experience factor is all about looking for the good news and preparing for the eventual good news.
It is ironic that Goodlad's first port of refuge in this current storm is the stormy world of resources and energy stocks. "The great majors like BHP, RIO, Woodside and Netcrest have been holding portfolios up. However, profit taking and falling commodity prices tend to add an air of volatility even to these stocks" says Goodlad.
Main driver
"Importantly," he continues, "whilst commodity prices are vulnerable to the same degree of volatility that is affecting every other market at present; bear in mind (no pun intended) that fundamentals continue to support base metals in a finely balanced supply/demand scenario."
What happens next, it seems, will depend on the global economy. On the one hand, global demand is the main driver behind Australia's energy and resource pre-eminence.
On the other hand Australia is one of the many globalised economies watching the battle between liquidity/solvency issues versus a global economy that is still estimated to grow at 4.1 per cent per annum according to the latest IMF forecasts. Today the bears are in the ascendancy. So where is the today's opportunity given that they are only ascendant and not the only beast in the wood?
"It has been said" says Goodlad, "that every bear market is the beginning of a bull market in disguise as it forms the base for the next rebound".
Taking domestic cash rates at 7 per cent per annum, and taking the stock market average (over decades) at 12 per cent per annum. (8 per cent capital growth and 4 per cent yield) than, as Goodlad concludes "holding a quality diversified Aussie portfolio over a period of time" should remain a priority for Australian investors and of interest to international investors.
Reminding me that "bears don't hold shares", is the same as the astute "you need to be in it to win it" call of the raffle ticket salesman. Meaning that the more aggressive investors will be looking for opportunity to invest today.
- The writer is chairman of Mondial Financial Partners.
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