Wealth Intelligence

So, you are a long term investor...

An overvalued market will always correct

1.  No surprise that the market 'corrected'

2.  Ignore the headlines: the sell-off is minor

3.  Client portfolios protected by high cash weight and low P/E

4.  Excellent positioning   

No surprise

After a period of low volatility and appreciating returns in the share market, it was always likely that a sell-off of some size and style would occur.  As we have said for some time, complacency has been high across financial markets, and some of the behaviour we have been seeing has been “risky”.

WI Feb 18 Market downturn

Minor sell-off

In terms of this sell-off itself: it is minor. Should we end the month here, it is only the 29th worst monthly market return in First Samuel's 211-month history. The market remains +6.8% for the last 12 months (First Samuel clients remain +15.4%) and the Australian market (in particular) is not outrageously valued.

Not expensive

At current prices, the Australian market is trading on a forward Price: Earnings ratio of 15.3x which is only 4% above its long-term average.  This P/E is an earnings yield (inverted P/E so E/P) of 6.6%, which is still 3.8% above the Australian 10-year interest rate of 2.8%.  

Given the prime factor in this sell-off is an assessment of improving global economic conditions (which may lead to higher inflation, and therefore higher interest rates to compensate) it is important to note that the equity market is not expensive when compared to interest rates.  Indeed rates could go back to “normal” i.e. pre GFC levels (6-7%) and they would still support equity prices around these levels.  An interest rate rise of this sort of magnitude is unlikely, albeit rates will probably trend higher over time.

As a result, provided this sell-off (which is very much of the normal size) does not in itself change the economic outlook (they usually don’t tend to, outside extreme 'crashes') then this should simply be a good heads-up for many in the market to check their behaviour and financial plans!  The value of a professional investment strategy has been under appreciated by the average investor in recent times!

The key metrics of our client share portfolios are significantly better than the ASX:

  • Expected earnings' (i.e. profit) growth is 9% p.a. over the next three years, compared to the market's 5%
  • The forward P/E is 10.2x, well under the market's 15.7
  • The dividend yield is 4%, about the same as market

We also have considerable cash on hand: about 18% of clients' equity portfolios.  And we expect to receive cash from several of our investments in the next couple of months, which will lift our cash balances to ~25%.

Excellent position 

This puts us in an excellent position to be able to benefit from any further mark-downs in the market by acquiring cheap, long-term investments at discounted prices.  

First Samuel clients are long-term investors.  A downward blip is not a cause for concern.

But, as always, if you do wish to speak to your wealth strategist, then call Nikki, Chris, Simon, Jenny or Jack.  Or more generally, Anthony.