Volatility has been remarkably absent with the S&P/ASX 200 trading in a tight range between 5650-5850 over the past four months. The market’s sidewise trading still accurately reflects an economy that has failed to break definitively out of its post-mining boom slow patch. It will take some stronger evidence of a clear acceleration in business activity before equity investors are likely to see improved outcomes.
The much-touted Trump rally has taken a U-turn and the likelihood of any further monetary support is low. So without the necessary ingredients for another broad-based rally, fundamentals and stock-specific catalysts will provide the important source of alpha over the next few months.
Focus shifts to first half 2017/2018 trading conditions and the financial year 2018 outlook
During this last reporting season, we flagged that on aggregate stocks look expensive when measured against delivered earnings and a predmoninantly cautious outlook for financial year 2018.
Equity valuations are elevated, the economic environment is difficult to forecast (ultra-liquidity from central banks is ending), and to say geopolitical risks are high is an understatement. Despite this, United States markets are hitting record highs and US equity volatility is close to a 24-year low.
A number of notable large market capitalisation companies disappointed such as CSL, Telstra, James Hardie, Ramsay Health Care and Woolworths, while we did see some smaller companies which fared better in performance. We think this signals a change in leadership and should see investors again seek growth outside of the market stalwarts.
The Annual General Meeting season starting this month therefore shapes as more important than usual in better defining the market outlook particularly if improving business sentiment continues to buoy confidence.
Volatility has been suppressed but not extinguished
The Bulls see low volatility as a by-product of conditions ideal for stocks to continue edging higher. They make the point that middling economic growth has kept the Federal Reserve in the US from tightening monetary policy too quickly, and as a result, investors haven’t fled from equities in a disorderly fashion. The rally has also been supported by an expansion in US corporate profits.
The Bears point to a lack of worry in the current eight-and-a-half year bull market as a signal that complacency has made traders vulnerable to unforeseen shocks. The fact that geopolitical risks are creeping up (populist political agendas, central banks tightening policy, North Korean tensions) compound that view.
We favour taking advantage of temporary equity market sell-offs, particularly in the environment of improving corporate confidence and a global cyclical recovery. We prefer to pick stocks that can thrive irrespective of the macro-economic environment.
- Boh Burima, Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 |