I’ve found over the years that the best time to buy stocks is when you feel the least confident about what will happen next in the market. Investors currently lack confidence and I believe now is the time to buy equities for anyone with a medium to long-term investment view.
There’s a lot happening around the world to make us very nervous, particularly in Europe. Currently, there are negative normal interest rates for two-year government bonds in Germany, The Netherlands, Finland and Austria. This means people buying those bonds are losing money and they must expect a deep recession or a depression in order to invest like that. The question is: how much of this is already factored into the market? Unfortunately, we never know until we look back and reconstruct history.
To see where we are going in the future, it is worthwhile to look at what has happened in the past.
Some interesting statistics
Let’s look at the numbers. I will refer to an excellent piece of analysis by Andrew McCauley from Veritas Securities. He has looked at the Australian stock market’s performance since 1950 and concluded that when the market (excluding dividends) has returned less than 3.48% in any seven-year period, (one of these was the seven years to 2012) then 75% of the time the market has returned on average 11.5% per annum for the next 3 years. This is shown in the table below:
From my perspective, the risk to this analysis is that there might not have been a period similar to the current one in the last 62 years. The counter for that point comes when I speak to anyone who was around in the mid 1970’s and they say that it was significantly worse. As one old stockbroker told me, “Things were so bad and volumes were so low, to survive, stockbrokers added a $5 order fee, on top of their usual (then) fixed commissions!”
Then there is the question, what to buy?
In these environments, I believe it’s important to have a combination of low risk deep value plays and some higher risk ones. The lower risk ones are easier to identify. Some that our Funds have been buying recently are:
Sunland Group Limited (SDG)
Currently trading at a big discount to its Net Tangible Assets (NTA). It has a buyback in place, which over time should help narrow this discount. The company is also leveraged to any rebound in the South East Queensland property market particularly, which should happen one day.
Clarius Group Limited (CND)
At the present time it is trading around its asset backing. In effect, the market is ascribing no value to the company’s operating business. The company is a cyclical play, which should do well once recruitment starts to pick up again.
Some people might think in this environment that is enough, but the problem with the low risk deep value stocks are they have a finite upside. We have all heard about the relativity between risk and return – low risk, low return, high risk, high return.
When the market does eventually rally, I believe it will jump 20% very quickly. So you need some risk in your portfolio. The stocks that provide reasonable market risk and are well priced that we own in our portfolio are:
McMillan Shakespeare (MMS)
This is a well managed strong cash flow generating business. They continue to integrate their asset servicing business they acquired recently and this provides a good complement to their existing salary packaging business. We expect their earnings growth to be close to 20% per annum over the next two years.
Breville Group Ltd (BRG)
The stock rates a buy on our proprietary rating template. The initial catalyst for us to buy was a positive earnings surprise resulting from the strong growth in Breville’s US business. Their American business continues to be the growth engine and we expect them to continue to deliver strong earnings growth in this difficult economic environment.
* The above stocks are held by Wilson Asset Management.
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