Too Late To Give Up Now

This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD

This story was first published two days ago in the form of an email sent to registered FNArena readers.

By Rudi Filapek-Vandyck

I went to a friend’s party recently and was asked by one of the other guests what I did for a living. After I’d answered the question the guest said: “oh, the sharemarket, yes, I tried that once”.

Turns out, she went to a financial planner, a few years ago, who invested her savings in the sharemarket. The next year she discovered the value of her shares had fallen by $10,000. Furious she was. She instantly withdrew all her funds and hasn’t looked back, or at the sharemarket, ever since.

I started to ask more details and soon discovered this all took place in 2002-2003. I told her: “you have an exceptional talent”. Not only had she managed to enter the sharemarket during the final stage of the previous bear market, she also departed just as a new bull market was about to take off.

Our guest is far from the only one who fails to understand that share markets move in cycli, not in straight trend lines. Yet, it only takes a long term overview of a share index such as the All Ordinaries to see that while the overall long term trend runs from the left corner at the bottom of the chart to the right corner at the top, it doesn’t happen in one straight go.

Every now and then the trendline is interrupted and pullbacks occur. Between 2000 and 2003 the trendline for the All Ords hardly moved at all, and it made a final dip in early 2003. By then our guest decided she’d had enough. No doubt she was by far not the only one.

Is history repeating itself, again? Market commentators in the US tend to talk a lot about the point of overall capitulation; when even the most stubborn bulls in the share market finally give up. That’s when you know the end of all misery is actually not far off. The point of overall capitulation is a contrary indicator and it never fails according to those who have lived and worked through a few bear markets.

Anecdotal evidence suggests many investors are about to or have already given up over the past weeks. When I talk to stockbrokers they tell me their clients are not doing anything. Website editors say visits and traffic are down. Volumes on the ASX, even on updays, are much lower than earlier in the year. Some financial services companies have started to lay off staff. Even institutional investors reportedly prefer the sidelines these days.

I don’t think we’re there yet, but I certainly see the signs of investors losing interest, or seeing no way forward as first share prices of banks, property trusts, media companies and discretionary retailers fell off a cliff and now it is the turn for energy producers and resources companies. There just is no escaping the bad news, and investment losses, these days, is there?

Here’s one cliche I happily borrow from the last Batman movie: it’s always darkest just before the dawn.

It remains too early still to assume that we have turned the corner in this bear market and that share prices will soon be able to stage a sustainable come-back. However, there are signs that suggest that what we have gone through since late May may have been the darkest hour. We can thus expect, optimistically, that dawn is coming.

One of such signals was delivered by the Reserve Bank Of Australia on Tuesday. As expected, the RBA left official interest rates unchanged at 7.25%, but the accompanying statement was clearly meant to prepare the market for future rate cuts, possibly as early as September. Certainly recent economic data would support such a move, and the decline of energy prices, and of commodities prices in general, supports a more relaxed view on inflation.

While there are still plenty of headwinds and challenges ahead, there’s no denying the underlying dynamics of the Australian economy, and the share market, have taken a turn for the better this week.While Australian consumers, and businesses, might still have a few tough quarters ahead of them, at least we all know now the RBA is ready to actively support overall economic activity.

It is likely the change in interest rate outlook in Australia will have severe repercussions for the Australian dollar. The currency has probably missed its chance to reach parity against the US dollar in this cycle, especially now that support from high commodity prices is dwindling as well. This will come as a welcome relief to all those exporters who have been suffering due to the Australian dollar’s strength over the past years, such as ResMed ((RMD)), PaperlinX ((PPX)) and Iluka ((ILU)).

Another consequence is that the reward for keeping funds in cash in Australia will start declining soon. Some economists are predicting total interest rate cuts will amount to 300 basis points in the 18 months ahead. This will make a presence in the share market gradually more attractive.

Bottomline: this doesn’t appear to be the right time for giving up, or for taking a long break from the share market. While the end of this bear market won’t occur tomorrow, history shows the next sustainable upswing lies ahead of us. The exact timing remains unclear, but there is a fair chance this week’s share market low might prove to be the bottom of this cycle.

Better to be ready and prepared when the next sustainable upswing finally arrives.

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