Wealth Intelligence

The share-market: It ‘feels’ worse than it is.

Key points:

1. Ignore the screaming headlines. Your share-portfolio is not the share-market. So focus on your portfolio. It is in much better shape than the market.

2. And the share-market is now just back to where it was in the middle of December. And at the end of September.

3. But the ride may be bumpy, as ‘feelings’ over-ride reality for a little while.

Happy New Year?

There’s nothing ‘happy’ about a 6% fall in the stock-market in the New Year so far. The headlines have told us that this is the worst start to a year since 1932. And so it ‘feels’ sort of, well, bad.

But hang on. What is the reality? Your Australian share-portfolio is not the market. It remains cautiously structured, with a cash holding of about 20% and a bias toward defensive stocks. And with enough exposure to opportunity stocks to provide good long-term growth.

In fact, taking the ‘feeling’ out of investments shows a positive story:

  Yield Expected 3-Y company profit growth, % p.a. Prospective P/E
First Samuel share portfolio 5.4% 9.6% 9.9
ASX 4.5% 2.7% 15.1
Your long-term advantage +0.9% +6.9% +52%

And, notwithstanding the market being a little expensive, some stocks have become cheap. For example, you may have noticed that we have purchased more BHP shares. The stock price is cheap (and might still get cheaper) but the long-term return prospects are strong.

Anyway, what about the market? Have a look at the chart, which shows the performance of the share-market this financial year. If you were not too concerned in the middle of December why now worry?

The Australian share-market is just giving up the gains it made in the ‘short-covering’ Christmas rally. And as of close of business yesterday (Tue-12-Jan) was trading on a P/E of over 15, slightly above its long-term average.

It’s not as bad as it feels: ASX is just trading within a band. The January fall gives up the December rally.

December rally jpeg

So, notwithstanding the fall, the market is still a little expensive.

The ‘correction’ to this level is about the market being over-valued. Had it been under- valued, or even fairly-valued, the economic slowdown in China would not have mattered.

In the short-term the share-market is a concentration of emotions. At the moment, emotion is somewhat exaggerated.

But, the ride may be bumpy

First Samuel clients have ‘stomach’. That is what allowed market downturns to turn out to be opportunities, not disasters, for our clients as they rode out the inevitable squalls. And we sense that some ‘stomach’ may be needed over the next little while, as the markets sort themselves out.

There is currently not a better risk-adjusted asset-class in which to invest for the long- term than shares. It’s just that it ‘feels’ worse than it is. So I ask you not to ‘feel’ but to look at the reality. And remember that your portfolio is in much better shape than the market.

As always, if any matters are of concern, or you would like further clarification, please contact your Strategist, Anthony or me directly.

IMPORTANT NOTICE:  Any advice contained in this document is of a general nature only and has been prepared without taking into account your personal objectives, financial situation or needs.
Because of that, before acting on any advice in this document, you should consider whether the advice is appropriate for you having regard to your personal objectives, financial situation and needs.