Are we there yet?
That’s the question on many investors’ minds these days. And it’s certainly one that our team is starting to ponder as the prices of many high quality businesses become more reasonable. However, before we start investing significant amounts of our clients’ capital, there are four things we want to see.
When the Coronavirus began to wreak its havoc on financial markets, the US stock market, which accounts for over half the global market, was more overvalued than at all but one time in its 147-year history. It was only ever more expensive during the height of the dotcom bubble of 1999. Thus, the Coronavirus pandemic struck at the time of the second most overvalued U.S. stock market ever.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Victor
:
I think the current rally in US and Australian markets is a bull trap. In 2008/09, US markets bottomed after the -8.4% 2008 Q4 happened. I think the June 2020 quarter GDP growth figures in the US and Australia will be -15% or so. I can’t see the markets rallying until the June quarter has passed. Hence, buying stock now could be unwise, better to wait until mid June. I believe the restarting of everyone’s economy will be a stepped exercise with some parts starting and some not. It could be very slow going for another 6 to 12 months before we are firing on all cylinders and have a vaccine. I don’t see a massive rise in GDP in the September quarter here or in the US but rather a slow but careful step on accelerator to test the waters to see if the virus comes back. If the virus returns after a restart, we may go back into hibernation for another 3 months. If not, then gradually accelerate until full speed is achieved and the vaccine is administered to everyone.
Roger Montgomery
:
Good thoughts Victor. Thanks for sharing.
Peter Chapple
:
Thanks Roger. I don’t understand why equity raising is so discounted to institutional investors. But do you generally expect a price fall around the time of the transaction, such as flight centre on 15/4 at 7.20 per share compared to current price over $10?
Roger Montgomery
:
Because a Placement is quick and cheap. Rights issues and SPP’s less so. Need to acknowledge that most of the placements are to existing holders. With respect to predicting the share price, I think a reasonable framework is to expect the shares to bounce initially because the company has been ‘saved’, but over the medium term to expect the share price to reflect the impact on intrinsic value.
scott rodd
:
Hi Roger. I was wondering what your thoughts were on flight centre now that they have completed their capital raising? I literally bought shares in the company an hour before they went into a trading halt at $10. Is it worth participating in the retail offer.
Thanks.
Roger Montgomery
:
It will save the company but massively dilute ROE and Equity Per Share. If the shares bounce significantly, that will help buyers but keep in mind the negative impact on intrinsic value.