Is the recovery sustainable?
November 8th, 2009 | Posted in General
Investor Update by Peter Spann
Our topic today revolves around the surprisingly strong market recovery we’ve seen since March 2009 and whether it is sustainable. A critical point for all investors to understand.
Investment markets wait for no man as can be demonstrated by the 40%+ moves from the March lows of many stock markets around the world.
And the Australian market has benefited significantly from this rapid change in market sentiment.
Profit Confidence
Share market prices are a measure of profit confidence of both individual shares and the market in general. When those expectations go up so does the market, when confidence is low, the market tends to suffer.
Early this year we cautiously advised our clients to re-enter the market through dollar cost averaging and without margin. Given the rises in the market I think this proved to be fortuitous and clients who took our advice have done well. Other clients who were already in also benefited seeing some lost value return to their portfolios. So good news all round.
Those that hesitate or focus on the past could forgo some of the best opportunities we are likely to see for some time. Crisis has always spelt opportunity to some, and if nothing else after a large fall there has to be a point when value says “buy”.
Sustained Recovery Likely
There have been concerns raised by some that this may be just a bear market rally before we slip into financial abyss.
That’s possible but unlikely.
The Australian share market is still sensitive to the US share market and that in turn is sensitive to the outlook of that economy which at best can be described as grim, so I understand where this negative sentiment is coming from.
As late as today (5th November 2009) the US Federal Reserve has indicated it will keep interest rates low to help stimulate the economy. The biggest issue is still availability of funding for businesses to grow and despite all the US Government’s best intentions that’s still impossibly tight.
However, there is little doubt in my mind that US shares and Australian shares were oversold. Too many people gravely concerned about the future. But now that confidence has returned to traders, it more about the market being overly sensitive to good and bad news. However I do think these recent solid rises have put a good foundation back under the market.
I think the best I can say is that volatility will continue. We will see sharp rises and falls, however in the medium to long term sustained rises are most likely and canny investors will use those rises and falls to add to their positions to gain value for long term investments.
Investing isn’t about being 100% right 100% of the time. It’s about weighing up the balance of probabilities at any given point in time and employing your capital to take advantage of opportunities.
And whilst the current recovery may have been too swift to sustain in the short term I am now confident that the economy will continue to slowly recover and companies that make up the market will continue to recover with it, indeed many will thrive.
Core Investing Strategy
The core of our investing strategy remains the same:
1. ASX 200
2. High Growth Companies
3. Emerging Markets
I believe that it will be the top end and the small end of the market that will show the best opportunities going forward.
The ASX 200 is heavily weighted with Banks and Resources Companies and these are booming.
Westpac announced today a $4.6 Billion profit and although this was down on last year Westpac Banking Corp chief executive Gail Kelly has delivered the stand out profit result of the annual reporting season saying there were already signs of an easing in bad debts and talking up prospects for the year ahead.
The big end of town are powering ahead in this economy, having trimmed back expenses and with ready access to funds through capital raisings, they're able to pick off weak competitors.
Resource companies were well positioned to take advantage of the economic recovery and are well on their way to increased profits.
Small nimble entrepreneurial companies are also taking advantage of market conditions and have been some of the fastest risers in the recovery so far.
To invest in the ASX 200 consider:
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200 Day Moving Average
A good long term traditional measure of money flowing into a particular market is the 200 day moving average as shown in the chart below.
It’s a blunt tool (as in it's not 100% correlated) but as long as the moving average continues to point up there will be more buyers than sellers over the longer term.
Notice how price moves away from and then back to the average a bit like a magnet?
We are currently experiencing some consolidation and wouldn’t be surprised to see a move closer to the 200 day moving average.
This will be an excellent opportunity to gain some decent exposure to equities at current levels.
Monetary Policy Points to Market Performance
Another indicator is monetary policy. We all hear about the problems the economy faces and there’s a lot of political noise about the what, when and how of the stimulus package but the fact is Australia remains quite robust thanks to 20 years of sound economic management and the resources boom.
Reducing interest rates and pumping liquidity into the financial system was the correct thing to do but it comes with consequences.
Ultimately at some point inflation will return and interest rates will move higher with a broader general recovery over time.
This chart compares the US Feds Fund rate (similar to Reserve Bank Cash Rate) and the S&P 500 over the last 5 years.
Again it is a blunt tool to use but it demonstrates that low interest rates stimulate activity over time. Initially that activity may only be because things can’t fall much further but success leads to more success and so starts the next cycle.
There is an old saying in the industry and that is “Don’t fight the Fed”. When they are pumping staggering amounts of money into the system and reducing interest rates as they have been it is likely to lead to a recovery over time.
Emerging Markets Continue their Meteoric Rise
China’s economic performance will exceed even Beijing’s lofty expectations in 2009, according to the World Bank, which sharply upgraded its 2009 growth forecast for the world’s 3rd largest economy yesterday from 7.2% to 8.4%.
To invest in Emerging Markets consider:
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Looking at the Shanghai chart (below) we can see that this market is leading the rest of the world indices.
It bottomed in October 2008 rather than March 2009 and was one of the first to recover.
It was also one of the first to consolidate after a large rally and we would not be surprised to see some sort of similar pattern play out with many of the Western Indices.
If the market were to get anywhere near this level it would be a massive “opportunity” for all of those that have yet to increase exposure to equities for the next up leg.
Longer term investors are weighing back into equities, commodities and emerging markets as they understand the recent actions of the various reserve banks around the globe.
Inflation will be a consequence of their actions. This will eventually drag asset prices higher but we need to ensure we are in the best performing ones to look to achieve returns in excess of inflation.
Two Exciting new Investment Opportunities
The RBS Accelerator Series
With Australian markets up 25.66% year to date and MSCI EEM Index up 62.05% Year to date many of our clients have been asking for a highly leveraged way to access these markets that does not have the downside of traditional structured products.
So we’ve been out amongst our network of professional investment managers and pushed them to create an exciting new product that we think has the potential to fulfil those needs.
And RBS have delivered with the new Accelerator Series, which are two year deferred purchase agreements linked to the performance of the S&P/ASX 200 Index or the iShares MSCI Emerging Markets Index Fund.
By investing just $5,000 you get:
- up to $33,000 in exposure to the S&P /ASX200 Index; or
- up to $26,300 in exposure to the Emerging Markets Index
This is a onetime only outlay, there are no loans or interest payments and the investment can never get cash locked.
So with a maximum of over 6 times leverage you really are accelerating your upside returns but limiting your downside loss to your initial investment outlay.
Accelerator also incorporates everything we’ve learned from volatile markets in the last few years and investor feedback:
- Low initial investment – you only need to invest a minimum of $5,000 – this means the downside associated with the investment is limited to the initial outlay;
- One time only outlay – the money you put down as your initial investment is all you have to pay. There are no additional fees or interest out of your pocket;
- High leverage – every $5,000 you invest buys up to $33,000 in exposure to the ASX 200 or $26,300 in exposure to the Emerging Markets index;
- Volatility managed – with markets going through a wild ride and volatility expected to continue you’ll get increased exposure when markets have been stable and decreased exposure when they have been volatile, protecting your investment from market extremes;
- Profit lock-ins – with highly leveraged exposure and volatile markets we’ve made sure you benefit from significant upward movements in the market by locking in target profits as they come. For every 20% upward movement half the increase is and remains locked in until the end (except in the case of Early Maturity where no profit lock-in applies);
- Short term – clients have given us feedback they want short term at the moment so we’ve delivered with a 2 year timeframe.
As with all investments it is critical that you read the PDS to fully understand how it works and the risks associated with the investment.
You can download the PDS at www.freemanfox.com.au/accelerator or call the team on 1800 000 369.
Managed Options Opportunities – The Buy Write Fund 
We recently launched our brand new Buy-Write Fund called Managed Options Outcomes (MOO).
This is our first pure buy-write offering.
- The Buy-Write Strategy is a popular way to generate regular monthly income through premiums, possible dividends and franking credits, and reduce downside in falling markets by supplementing falls in share prices with the income generated. Investing in the MOO™ Fund gives you access to the strategy without the need to manage it all yourself.
Plus… through MOO™ you can also enjoy:
Professional Management
If you don’t have the time, expertise or interest in managing your own strategy, you can have it managed for you through MOO™.
As Chief Investment Manager, I will be applying over 15 years of practical, hands on experience investing in buy-write strategies and I head a team of experienced portfolio managers, researchers and investment professionals.
Monthly Income Distribution
The MOO™ Fund will write options over a portfolio of shares selected from the top 50 ASX listed companies by market capitalisation.
Your returns can come from a variety of sources including:
- options premium income;
- regular dividends from direct investments in the ASX listed securities;
- franking credits;
- any interest payments from cash deposits; and
- medium to long term capital growth in the overall portfolio.
And there will be monthly distributions. You can receive this as income or you can choose to re-invest, potentially enhancing your capital growth.
Diversification
Pooling your funds with other investors enables the MOO Fund to invest in a greater variety of shares than most individual investors are able to. This reduces your exposure to loss from a single share or sector.
Get started for less
MOO™ allows you to start using the buy-write strategy with the relatively small amount of $5,000 with a monthly investment plan of just $100 whereas generally you’d need a larger amount of capital to successfully trade a buy-write strategy on your own.
MOO™ makes the buy-write easy!
If you’d like to use the buy-write in your investment strategy and have it managed for you, then MOO™ could be for you!
For full details and to decide if this investment is appropriate for you, download the PDS at www.magicmoocow.com.au/managed-options-opportunities or call the team on 1800 000 369.
Action Stations
There is no doubt a world of opportunity abounding in share markets at the moment.
Yes, it’s volatile but therein is the opportunity.
We encourage you to view all the investing opportunities we have for you at the moment to determine if they are suitable for you.
If you need advice call our team on 1800 000 369.
Important Information
Peter Spann is a representative of Freeman Fox Ltd ABN 17 010 763 041, the holder of an Australian Financial Services licence (AFSLN 246510). This general advice is provided by Freeman Fox Ltd. It does not take into account your investment objectives, financial situation, or needs. You should consider the appropriateness of this advice having regard to these matters, and read the relevant Product Disclosure Statement (PDS) before making any decision to invest.
Accelerator Series Units - S&P/ASX 200 Units & iShares MSCI Emerging Markets Units ("Accelerator") is issued by RBS Group (Australia) Pty Limited ABN 78 000 862 797 (AFSL: 247013).
Fundhost Limited ABN 69 092 517 087 AFSL 233 045 (“Fundhost”) as the Responsible Entity is the issuer of the Managed Options Opportunities Fund (“MOO™”) ARSN 139 641 946. Excela Pty Limited ABN 25 124 028 244 (“Excela”) is the Investment Manager for MOO™. Excela is a Corporate Authorised Representative of Freeman Fox® Limited which is the holder of an Australian Financial Services Licence (246510) and a Market Participant of the Australian Securities Exchange (“ASX”).
Information contained in this update is obtained from various sources. The changing character of markets requires constant analysis and may result in changes. Past performance is not a reliable indicator of future performance. All investments contain an element of risk. Actual performance will be different and returns are not guaranteed. While information in this update is given in good faith and is believed to be reliable and accurate, Freeman Fox gives no warranty as to the reliability of accuracy of the information, nor accepts responsibility for any errors or omissions of third parties. Opinions expressed are subject to change.
If you require assistance in relation to your personal investment situation please contact a representative of Freeman Fox Ltd on 1800 000 369. For a copy of our Financial Services Guide, please go to http://www.freemanfox.com.au.