Positioning for the future
Earlier this week, First Samuel sent clients an email about our thoughts on the current market. As a brief synopsis:
The Australian market has entered a correction phase (>10% fall since the recent peak), and has now moved to being ‘undervalued’ (i.e. the current market P/E is lower than the long term average P/E).
Your equity investments have not been immune to these falls, with a number of investments in your equity portfolio now being meaningfully undervalued. However, on a 3-year investment horizon we are expecting good returns to be delivered – from dividend yield, plus EPS growth, plus gain from the P/E re-rate. This equates to a 13-16% expected average p.a. return (although it is highly unlikely to be linear!).
In addition to this, this is also a time where we are able to position your portfolio for the future. What do we mean by this?
During times such as we are seeing now, more opportunities to buy shares on favourable valuations arise. To be frank, in recent times we have struggled to identify many opportunities that meet our investment criteria, especially in regard to 'value'. (This is why your cash balance has been high when compared to long term historic average level.)
So your Investment Team is actually quite excited by the opportunities presented right now (noting that we are also aware that these times can be hard for some people owning shares, especially those with a short term investment outlook).
During corrections such as this, some large discrepancies can arise between value and share price. Reasons for this vary; it can occur due to low liquidity of certain stocks, or when there are forced sellers. An example of this is a fund being required to sell a significant holding to fund redemption requests (as happened during the GFC when we were able to purchase a meaningful block of shares in Patties Foods at a very good price).
When there is market weakness, occasionally we will sell one of the holdings in your portfolio. This may seem counter-intuitive (generally selling a viable investment in a weak market isn’t a good idea).
In such cases, we would sell the holding because it has become unattractive relative to other opportunities. (Typically we aim to sell investments to realise a gain after holding it for a long period.) Therefore, if you see a sell trade in your online reports in a weaker market, it will likely have been done to facilitate a comparatively more compelling opportunity.
With our 3-year investment horizon, we are able to wait for mean reversion to occur. This means that share prices will return to their average historical valuations (for instance P/E) – allowing for the impact of new information / developments (for instance an accretive acquisition).
And in the interim, while we wait for this to happen, we usually receive a good dividend.
Whilst we are seeing opportunities to invest, we are doing so in a measured and considered manner. To date, this has entailed increasing your holding in investments which were smaller portfolio weights, such as MMA Offshore and Aveo.
Over the short term, we are likely to continue such “top-up” purchases, as well as look to add new investments into your portfolio – where they are consistent with our investment ethos and share prices are favorable. (We will obviously keep you informed, and you will see any changes in your daily transaction reports).
The market has entered a correction phase. Currently we are seeing some good opportunities to position your portfolio for future growth; thereby the current market weakness becomes an opportunity to benefit in the future.
- Fleur Graves