Is that the time?
The ASX 300 Accumulation index is up 14.7 per cent so far this financial year. The long run annual average return on Australian equities is around 11 per cent, comprised of 4-5 per cent dividends and 6-7 per cent capital growth, so we have seen more than a year’s worth of gains in under 4 months – about 4 times the normal rate.
So what kind of thoughts should this provoke?
Firstly, there’s nothing wrong with being pleased about an increase in your wealth. That is exactly the outcome we are aiming for, so a tinge of investor satisfaction is completely in order. But what next? In the context of this growth, how should we be thinking about investing for the foreseeable future?
Regular readers will know that we at Montgomery claim no insight into what the market might do short term. However, in the long run, we are convinced that prices follow value. So, we can see no reason why the market shouldn’t continue its run indefinitely…
…that is, provided earnings and valuations are growing at around 40 per cent p.a.
It’s hard to leave a party when it’s in full swing, but if company earnings are growing at a slower rate than this, the logical response for long-term investors may be to gently start taking a little cash off the table.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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.
david howard
:
I don’t think it is a valid point to say that a yearly average is X and over the last 4 months growth has been Y and try and draw something from that. I might walk 10,000 steps a day. If I have walked 11,000 steps by lunch time it may mean I will slow down or it might be the day I play soccer.
Imagine a share that has a price that follows a sin wave. The average growth is zero but after a period of high growth it grows slowly before starting to fall.
I took the daily record for the ASX300 from 1993 and looked at the increase over 89 trading days (as an approximating of 4 months) and looked at what changed over the following 45 trading days (as an approximation of 2 months). The idea being once there has been an increase over 4 months, what is likely to happen next.
There was 273 cases where the preceding 4 months had grown by 13-17%. The average increase from those 273 cases was 2.1% over the next 2 months. The median increase was 2%.
Michael Shapiro
:
On the face of it earnings should have an impact on valuations and they undoubtedly do. However I feel asset prices are more influenced by money supply and/or liquidity. What we are witnessing is asset inflation in response to increase in money supply. Funny that official inflation figures only reflect consumer prices and ignore asset prices. So according to government statistics, we have low inflation. In the past governments would just print money and give it to themselves resulting in consumer goods inflation. Today the system is a bit more sophisticated. The government first creates asset inflation then claws the money from inflated assets through taxation. This way everyone is happy especially those who have money to invest to participate in asset bubbles created by governments. In short, in the world of fiat currencies whose supply is unlimited, asset prices can rise forever as long as money supply keeps on increasing, regardless of earnings or valuations.
Roger Montgomery
:
Good observation Michael. But do keep in mind that rising money supply does not prevent the occasional disruption/correction/realignment et al.
Chris Embery
:
Roger,
I invest long term in ETFs, and just looking at the P/E ratio for the S&P500 and EU350 indices, they feel _very_ overvalued to me, especially given the US S&P500’s run in the past year. The earnings just haven’t caught up to the price (in general), and that’s a really simplistic indicator (PE).
Point is – it’s not just here that overall, the major index feels overvalued. You should also look at the amount of debt that the private sector is carrying (e.g. HKG companies)…that just adds to the problem.
Roger Montgomery
:
Great point Chris
John Penn
:
Stocks of fund managers do particularly well in bull markets. Two I’ve found with great potential are FPS and PFG – any other suggestions for this sector?