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Perspective: Investment Background – Jan 2016

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Investment Background Briefing – 29th Jan 2016

 

What did happen?

  • Financial markets and the media are consistently preoccupied with short-term assessments of events such as the recent weakness in the Chinese stockmarket.
  • There’s a lot that investors could worry about. An incomplete list could include a British exit from the EU, political turmoil in Europe stemming from the refugee crisis, an Iran vs Saudi Arabia war, the election of Donald Trump as President of the USA, the Fed making a mistake and raising interest rates too quickly or the oil price falling to $20 per barrel.
  • These feed into the collective angst, which is gripping markets. While they should not be totally ignored, in our view, their influence on equity markets is offset by the continued very low level of interest rates and the size of the ongoing stimulus from monetary policy.
  • The US Federal Reserve has just decided to keep its Federal Funds Rate target unchanged while it assesses the impact of global developments on the US economy. It is clearly concerned that its plan to lift rates may be risky.
  • Stockmarket declines around the world have been significant in recent weeks but not catastrophic. Their significance lies in the opportunity that they may offer for accumulation of stocks at attractive prices.
  • As we have concluded from our long-term Global Equity Fair Price Analysis, equities in the USA and Australia are attractive from a medium to longer-term point of view over the next three to five years.
  • We expect equity markets to continue to offer attractive returns relative to cash and fixed interest over the next five to ten years.
  • We see no reason to change asset allocation strategy yet, maintaining a neutral or benchmark weight to Australian and international equities and even in property.
  • We are, however, still cautiously awaiting a short-term pullback in equity markets, which will provide an opportunity to go overweight in equities, based on the prospect of longer term equity price growth.

 

Our valuation work indicates:

  1. The US equity market is now fairly priced on a scenario weighted basis;
  2. The European, British and Japanese equity markets are still expensive;
  3. A worldwide equity portfolio based on the weightings in the MSCI international world index, would still be expensive;
  4. The Australian equity market is slightly cheap on a scenario weighted basis;
  5. Within the Australian equity market, AREITs (listed property trusts) and Industrials look cheap, while the Materials sector (BHP, RIO) is expensive. Financials including the banks look slightly expensive if we are headed into a recession scenario but otherwise look fairly priced to slightly cheap.

 

In summary: 

  • Given that momentum is essentially neutral, more reliance should be placed on the valuation and qualitative factors.
  • The Australian equity market is still in the fair value range and is significantly more attractive than most international markets.
  • The US equity market is still reasonably attractive compared with other international markets on a long-term valuation basis.
  • There is still the prospect of instability in monetary policy and financial market reactions so caution is still warranted.
  • The low level of bond yields and short term interest rates and the pursuit of yield are the key factors making Australian and the US equities markets appear to be reasonably fairly priced against other asset classes.
  • Given the volatility of markets we could not rule out a further significant pull back in prices in Australia or in the US of the order of 5% or more. This would offer an attractive accumulation opportunity for investors operating on a longer-term 5 to 10 year timeframe as we see continued low bond yields being fairly supportive of equity prices in the medium to longer term.

 

 

 

 

 

 

 

 Madison

Planning Perspective Gold Coast Pty Ltd is a Corporate Authorised Representative of Madison Financial Group Pty Ltd | AFSL No. 246679 |

ABN 36 002 459 001 http://www.madisonfg.com.au

This document and its contents are general in nature and do not constitute or convey personal advice. It has been prepared without consideration of anyone’s financial situation, needs or financial objectives. Formal advice should be sought before acting on the areas discussed. This document is a private communication and is not intended for public circulation other than to authorised representatives of the Madison Financial Group and their clients. The authors and distributors of this document accept no liability for any loss or damage suffered by any person as a result of that person, or any other person, placing any reliance on the contents of this document.