FYI | Aug 10 2016
By Peter Switzer, Switzer Super Report
Fund managers like Roger Montgomery are holding 30% of their assets in cash but will they have to change their minds about being under-invested in stocks after those great job numbers in the US over the weekend? Only a week ago I was getting negative on stocks, and I told you so, but this Monday I was a lot less worried about waking up one morning in the not too distant future to a potential stock shock.
Of course, with both the S&P 500 and the Nasdaq indexes at record high territory, it’s harder to get too bullish, with current P/E levels pretty damn high but with interest rates so low, I still think we’re playing a different game than say 10 years ago.
In that pre-GFC and pre-QE world, if a price-to-earnings ratio for a stock or a stock market was 20, you’d ask why am I copping this more risky stock when I can get 5% or more in a term deposit? Now sometimes the answer was that the company was so good that capital gain plus a small dividend plus franking credits were bound to beat 5% easily so you stuck with the company.
However, for other companies you would select the risk-free term deposit and the stocks’ price could fall. But that was then. This is now and term deposit rates are nowhere near 5% so stocks continue to sneak higher as the investor chase for yield and companies paying dividends instead of retaining earnings to invest for the future continues.
Charlie Aitken put Roger’s holding of cash into perspective with a Bank of America Merrill Lynch survey of 195 global investors saying they were holding 5.8% of their assets in cash, which was the highest holding since November 2001, which was in the dotcom crash of the US stock market when the Nasdaq lost 78% of its value!
These are crazy times when bond yields are lower than what was seen in the Great Depression, so relatively high cash holdings make some sense. However, the question remains: do we play a cautious game now or load up on stocks?
Charlie argued that a rotation is in train and it will be out of the safe, higher yield-paying stocks such as REITS, utilities, telcos and consumer staples for more cyclically-inclined stocks, which undoubtedly would help the banks and the miners.
The fear embracing the financial world has seen banks trashed in recent years from Deutsche Bank to Barclays to Citigroup but whenever the economic outlook picks up banks bounce.
When the world got negative on stocks, the bank’s share price showed it but as optimism has crept back since February, the trend is starting to look positive. But what could have derailed this bounce-back? Well, try a bad jobs number on Saturday!
That didn’t happen. What else? A bad result with the Italian referendum that could raise questions about the viability of the Eurozone. That lies ahead and, of course, Donald Trump remains a question mark for stock markets.
And of course, when the Fed again raises interest rates, this will be a new test for markets and provided no new big scare factor emerges of a Brexit-kind, then I expect the Yanks will see rates go up in December to salute a newly-elected president.
Personally, I’m not rushing to buy stocks here but I could be proved wrong if reporting season comes in better than expected. I wouldn’t be surprised to see the likes of Blackmores spike higher being at $156 while analysts’ consensus target price is around $185! And CEO Christine Holgate seldom disappoints around reporting time!
I do expect something to derail the current confidence levels around stocks, which will be higher this week following the 255,000 jobs created July, but I’m not expecting a big sell off and I will be a buyer then. I’m not holding 30% cash, but if I were, I’d be readying myself to increase my exposure to growth stocks.
Those job numbers have hurt the gold price, as some experts tip a US rate rise sooner rather than later. Throw in the bullish predictions for the oil price, which look more convincing than lower ones, and it’s going to be a surprise curve ball that will give Roger a chance to put his cash to work.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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