While markets continue to react to every headline, or lack thereof, out of Europe, I still tend to believe we are in some sort of market bottoming phase. Sentiment is so shot to pieces that the risk of a rally is now large, particularly into the end of the year when the hedge-fund world begins its search for performance fees.
Just about everyone I’ve visited in London over the last few weeks is now well positioned for a sustained bear market in global equities. The hedge funds are running very high cash levels (the highest since the peak of the GFC), the pension funds are very underweight in cyclical and financial stocks and overweight in the defensive sectors, while in Australia, private investors continue to move out of equities and into term deposits and annuities.
Add to this the fact that the corporate world is running record cash levels and you can see that we are much, much better positioned in terms of available cash going into this European credit crisis compared with the US-led credit crisis of 2008. Global cash weightings must be the highest on record, despite interest rates in most of the developed world being near zero.
So, I’ve come to the conclusion that everyone is bearish, and that’s absolutely justified on what we know today. Yet more interestingly from a market perspective, everyone is cashed up and positioned for it.
The biggest risk now for investors is not that the stock indices fall further; it’s actually that we enter a rally that forces institutional, corporate and private investor cash in from the sidelines. And remember: bear market rallies are the most violent of all.
While I may not get the exact bottom of this correction right, my gut feeling is that now is the time to cover short positions, increase cyclical risk and deploy some cash in your portfolio.
The ASX 200 seems happy to hold support around the 4,000 level, the Euro-mess is a known ‘known’, and we think the fourth quarter of 2011 will be a little brighter as Central Bank liquidity shores up the market.
With the equity market paying you a mighty premium to take a risk, it’s now time to take one. I think investors should increase exposure to companies connected with Asia over the next few weeks and emerge into the final quarter of 2011 with a portfolio of bottom-up, deep value and cyclical leverage (and significantly less cash and short positions). My view is you have to use the next few weeks to build that portfolio while volumes are low and investor sentiment is appalling.
If we are right and the fourth quarter is a little brighter, you’ll see a wall of cash drive a very significant bear market rally.
So, I’m urging you to get a little braver and focus on three months from now. But anyway, is it really brave to buy low, or just sensible?
Here’s some stock recommendations for the week:
TPG Telecom Ltd (ASX:TPM) – Reduce
We see key risks to TPG’s business model. Nothing in this week’s annual result addressed our key concerns around TPG’s broadband strategy and we still believe the National Broadband Network will reduce TPG’s comparative cost advantages. A lower focus on customer service relative to its peers could possibly result in higher churn. Given these concerns, we retain our ‘reduce’ recommendation and a target share price of $1.61. We continue to see better value elsewhere, including IIN, which we have an ‘accumulate’ recommendation on with a target price of $2.93.
Emeco Holdings (ASX:EHL) – Buy
It has now been almost two years since Emeco began to release capital from underperforming businesses and reinvest it in a production-based fleet. The initial phase of the strategy is now complete. The recent full-year result raised some concerns around redeployment of the Macarthur River fleet, which accounts for about 9% of revenue. However, we don’t expect any major issues with this given the demand backdrop. The trajectory in Emeco is clear, with an improving return on equity, strong cash realisation and higher level of production-based revenues underwriting growth in net tangible assets. We retain our ‘buy’ rating with a $1.39 price target.
Monadelphous (ASX:MND) – Buy
MND has announced a $150 million structural, mechanical and piping construction contract at the Hope Downs 4 Iron Ore Project for Rio Tinto and Hancock Prospecting. The contract is due to be completed by the second quarter of 2013. We expect the contract to contribute $65 million in revenue in fiscal 2012 and $85 million in 2013. The project is expected to be the third largest iron ore project ever undertaken by MND and it is consistent with our views that MND is likely to be viewed as a preferred supplier by its key customers (RIO, BHP and WPL). We also expect further material contract wins in the coming months. We retain our ‘buy’ rating with a target share price of $21.25.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in today’s Switzer Super Report
- Peter Switzer: Six reasons why it’s better to invest for the long term
- Tony Negline: How the contribution rules change at 65
- JP Goldman: How risky is your ETF?