FYI | May 23 2007
I don’t know about you, my dear readers and subscribers, but I am getting tired of market commentators telling us it’s time for a correction.
Over the past week we’ve seen the Chinese government tighten the liquidity screws one step further, while allowing some hot investment money flow out of the local share market; we’ve again been confronted with increased violence in Palestine, some significant price falls for base metals; and we saw at least one of the largest private equity deals in the country turn pear shaped, another failure is likely to follow within 48 hours.
And how has the share market responded? By recording new record after new record.
Time for a correction? No doubt. The local index is currently on track for some 30% return for the calendar year, which seems a bit rich even for the world’s “gateway into China”. But as I’ve stated before, valuation in itself is never a reason for a price retreat (neither for an upswing).
So what could be a possible trigger? Well, any one of the factors I summed up in the second paragraph could have been viewed as a potential catalyst, prior to the actual event. As it happened, however, the market took note of each event, paused for a deep breath and continued the upward path.
It is difficult to see anything stopping this bull market at the moment and this can only mean two things: either a trend break is close (peaks always come with blue skies and a fair degree of euphoria) or this bull market is simply not ready to pause yet.
There are plenty of arguments for either scenario to unfold. There’s still the global liquidity chasing too few assets argument, and it really is a global phenomenon not just an Aussie or American thing.
There’s the goldilocks argument with global economic growth at a healthy pace and inflation subdued (and thus bond yields and interest rates contained) and equities undergoing a re-rating as a result.
Overall risk appetite is on the rise. And maybe, just maybe, the omnipresence of private equity with pockets full of cash, and hungry for deals, has added a few notches to today’s markets’ overall valuation multiples.
Meanwhile, as is the nature of the game, some warning signals have started flashing. It may well be that tomorrow’s correction trigger is already among us, for what do we know?
The US dollar seems firmly on the rise. This is always dangerous. Firstly because the whole wide world, including every man and his dog, is either short the US dollar, or bearish, or both. Secondly because a surging US dollar impacts on numerous other assets such as precious metals and other commodities.
No surprise thus commodities markets seem once again to have landed in a good old fashioned correction. Some commentators are already polishing their told you so sign. As things stand right now, and given the experiences over the past four years, this can still go either way. There’s no denial however that seeing prices drop by large numbers every day does increase general discomfort.
Given the central role of low bond yields in the equity re-rating story there is more than a fair chance that rising bond yields will bring an end to this up, up and away trend. As it happens, bond yields are on the rise. Some experts have already pointed out that yields on US ten-year loans are up 19 basis points over the last eight trading sessions.
So what’s happening? Are investors coming to grips with the fact that the next move by monetary policy makers in most countries, including the US and Australia, might well be further up instead of down?
Or is this simply the logical impact of lesser money inflows from Asian central banks?
Better to keep an eye on this because if this trend continues it will eventually catch the attention of the market, meaning all those broken record commentators may still get what they are asking for, and soon too.
Investors who are genuinely worried about a pending retreat in global share markets, and if you are this is very understandable given the amount of correction callers around, those investors may want to draw some confidence from the fact that respected asset strategists at household names such as Merrill Lynch, Goldman Sachs and UBS maintain a positive view on equities “post any potential temporary pull back”.
Few experts in the market doubt that if the widely called for correction eventually does show up, share markets will be ready for a bounce back, and probably fiercely so.
Maybe there are some insights to be gained from the latest adjustments to the conviction list of Shaw Stockbroking this week (has anyone else noticed how all equity brokers seem to have a need for a conviction list these days?).
While arguing the fact that it has become increasingly difficult to find “real value” in today’s share market, the broker has maintained seven stocks as its most preferred Buys for the next twelve months. These seven are: BHP Billiton (BHP), ConnectEast (CEU), Candle (CND), Lend Lease (LLC), MYOB (MYO), QBE Insurance (QBE) and Suncorp-Metway (SUN).
The following stocks have disappeared from the select list since the previous update on May 5: MFS (MFS), Publishing & Broadcasting (PBL), AXA Asia-Pacific (AXA), News Corp (NWS), Toll Holdings (TOL) and National Australia Bank (NAB).
All these stocks are still rated Buy (but with less conviction), except NAB which has been downgraded to Accumulate.
I guess all of the above means these high conviction stocks should be considered worth buying before and after a potential share market correction. After is better, of course.
Till next week!
Your I thought it was time to sing a new song editor,
Rudi Filapek-Vandyck
(as always supported by the Fab Three: Greg, Chris and Terry)