What’s happening in the market?
The market has had a spring in its step this year. In less than 2 months the S&P/ASX200 Accumulation Index has added around 10 per cent. If it continued at this rate we would finish the year more than 60 per cent up – an extraordinary result by any standards.
While it’s natural to be heartened by these sorts of gains, it’s important for investors not to get too swept away in the good cheer that seems to be running through the market. At a time like this, there are a few points worth keeping in mind:
Firstly, the recent rises have not been driven by a dramatic improvement in the intrinsic value to be found in ASX listed companies. Mid-year reports have generally been ok but nothing special, and so market rises have come more from multiple expansion than earnings expansion.
Secondly, intrinsic value was not abundant to begin with. On our assessment, the market was slightly expensive going into calendar 2015, and now looks to be more so. This does not mean it will turn any time soon, but it does mean that the long run investment return available from here is lower than it might otherwise be.
Thirdly, it is a well-established phenomenon that investors tend to tip money into equities after a strong run, and take it out after weakness, thereby locking in a practice of buying high and selling low. This practice has a devastating impact on long-run performance.
This is not to say that you should be running for the hills. Equities – even expensive equities – tend to offer a fairly good long run risk-adjusted return, and if your timeframe is long-dated, it generally makes sense to be in the market, at least to some extent.
However, if you have been keeping some chips off to the side of the table and are tempted now to push them towards the dealer, your instincts may not be serving you well.
In equity markets, quite often the right decision is the one that feels the worst.
Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To learn more about our funds please click here.
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.
Duncan Lenton
:
Right Decision is the one that feels the worst.
Telco’s have taken a bit of a battering in 2015 for some reason. I’m hoping its profit taking and chickens. BGL, MNF, VOC, MBE, all seemed to have had pretty good result and their long term prospects seem good to me. Their Skaffold scores have, mostly, gone down due to investments. Positive for the future!?
Challenger has dropped it’s skaffold score dramatically to a C5. Non investment grade. This is telling me i should sell.
If the right decision is the one that feels the worst. Now is a good time to increase holdings of some telco’s and i should keep hold of Challenger.
It does feel bad!!
Cheers for now
Dunc
Roger Montgomery
:
G’day Duncan,
You have to follow a process and it is essential that you develop one and stick to it with consistency. You must also seek and take personal professional advice.
Duncan Lenton
:
Roger
Thanks for that. I give all my money to you to look after and grow. I only have $5K i play with and I’m currently beating your fund on the year. I’m not bragging. :-) Profits go to you.
Do you see merit in investing in a C 5 company?
Thanks for work
Dunc
Roger Montgomery
:
As they say, don’t mistake a rising market for genius. When profits are made on a C5 company, they are usually temporary in nature! Be careful Duncan.
Greg McLennan
:
Skaffold might have a problem with Challenger’s debt but I if you go back a few blog pages here you’ll find an article outline mitigating factors regarding that side of things.
Duncan Lenton
:
Thanks Greg and Roger
Dunc
Kelvin Ng
:
Thanks Tim.
Here’s a revealing interview with Stanley Fischer, Vice Chair of the Federal Reserve.
http://finance.yahoo.com/video/feds-fischer-rate-hike-high-202400169.html
Kelvin
Andrew Legget
:
“Firstly, the recent rises have not been driven by a dramatic improvement in the intrinsic value to be found in ASX listed companies. Mid-year reports have generally been ok but nothing special, and so market rises have come more from multiple expansion than earnings expansion.”
This is similar to my first thoughts when i read your opening paragraph. Despite the spring in the markets step, there appears to be no real evidence of that in many company results.
Today for example saw the release of Woolworths results which the market found dissapointing. I had to write an analyst recommendation report for uni on Woolworths last September and rlabelled it a “sell” so it does not necessarily surprise me. The company has, what i believe, to be a number of very substantial issues it needs to address. Thats ignoring the put option that Lowes has on its share of the ownership of Masters.
Not seeing a lot of reason to be optimistic with at least many of the companies i follow, so trying to expand my net out a bit wider and use it to learn a bit more about other businesses that are out there.
The risk is that when market movements tend to be due to no fundamental reason then they can as easily dissapear as quickly as they appeared in the first place.
Roger Montgomery
:
Well done on your “Sell” recommendation for WOW. We think margins are under pressure for some years. Have a look at charts of incumbents around the world after Aldi appeared.
Sahil Dmello
:
Hi Tim, Great article as always. Could you please the last sentence which states “In equity markets, quite often the right decision is the one that feels the worst”.
Thanks,
Sahil