I have to admit I am somewhat stunned that the entire year’s performance in Australian equities has been wiped out in ten trading sessions. In US dollar terms, the ASX200 is now down 0.7% on the year, while in Australian dollar terms we are still up 2.7% for the year. I feel like the mayor of Hiroshima after the last two weeks.
All the good work our equity market did grinding up on domestic issues has been wiped out by a global macro re-correlation trade that has been brutal and indiscriminate. High frequency trading exacerbates the downside, but it is what it is.
Yesterday the rout got so aggressive it even brought out ‘winners selling’ in the cash equities market, confirming the old adage “even the pretty girls get hurt in the bus crash”. I got the rate cut and shorting the currency right, but have been sideswiped in some, but not all, of my favoured large cap equities by global risk aversion.
What history shows us
However, the history of trading corrections is that when people start selling winners, the peak of the correction is near. Similarly, the speed and scale of the fall almost ensures some rebound to reclaim at least half the fall at some stage.
There are periods when share prices disconnect from fundamentals, but particularly when a major macro fear event is upon us. Obviously, I am completely on the wrong side of this trading correction, feeling this May would be different to the last two. How wrong can you be? A Greek election got me; a bloody Greek election!
The problem with aggressive market events like this is they simply destroy investor confidence. That confidence takes months to build up, and days to destroy. However, events like this also lower expectations and clear the way for a recovery. We have now had biannual market events like this since 2008 and the peak of them all has been a buying opportunity in mispriced growth stocks, or those with sustainable dividend yields.
Focus on the bottom up
All I can do in these top-down market events is to focus all our efforts from the bottom-up on companies. Eventually companies are priced on their sustainable earnings and dividends, not fears of a Greek exit from the eurozone.
While it may seem years away in market terms, the 2013 financial year starts in less than a month and a half. In writing investment strategy I have to focus on 2013 and where I see attractive multiples.
So today I thought the most useful thing I could do was look at the fiscal 2013 investment arithmetic for the 10 large cap stocks in my high conviction buy list. All the multiples are based off last night’s closing price.
Two grossly cheap stocks
This list is actually telling me the first two stocks to shut my eyes and buy are FMG and SVW. They are grossly cheap on price-to-growth multiples and are the two stocks most likely to deliver me upside alpha in any more normalised risk tolerance environment.
Obviously STO’s numbers don’t look great, but that’s a bit unfair as STO is a calendar year company and the growth in calendar year 2012 is very strong. If you averaged it out over the two years, it is acceptable and I am going to stick with STO at these prices.
Despite the short-term share market action I remain convinced the second half of the year in the Australian economy will be better. The genuine positives of a lower dollar, lower interest rates and the potential for a change of government are all being overshadowed in the short-term by global macro risk events. That global macro risk dust will settle like it always does.
When everyone is a trader you need to be an investor. Everyone is an expert on Greece, but Greece won’t price Australian companies in the medium-term. Just remember back to October 2011 and what you should have done at the time. This is no different in my view. Risk and growth are extremely cheap, equity yield is dramatically more attractive than bond yield, and the headlines are all the same. Defensives and all forms of perceived safety are grossly expensive. It’s déjà vu all over again.
Go Australia, Charlie.
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. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.