Ron Bewley, executive director of Woodhall investment Research, says the market is in the grip of a “panic attack”. Bewley says the panic will pass and the market will rebound – but the timing of a rebound remains uncertain.
“The fundamentals are strong,” Bewley says.
“Company announcements are generally very good, particularly in America. They are cashed up and therefore not in the same position they were in 2007/08.
“What has happened is the realisation that America has not been dealing with its problems, and doesn’t know what to do.
“Its long-term debt has been downgraded, but almost two days later they reaffirmed the ratings on the short-term debt.”
Bewley says the reaffirmed short-term debt rating of A-1+ means “they have got no problems at the moment”.
Analysts have said the stable short-term rating means that bond and money-market funds may not be forced to sell their holdings of US Treasury bonds.
Bewley says the fall on markets may last a while longer yet, but at some point “someone will say or do something or another, and it will shoot up – because it’s massively undervalued”.
One such catalyst might be an address tonight, Australian time, by the Chairman of the Federal Reserve Board, Ben Bernanke.
“But if he doesn’t say the right thing, it could go down further,” Bewley says.
Another catalyst might be the Republican party announcing it can work more constructively with Democrat President Barak Obama on addressing the US’s economic issues.
Bewley says it’s worth noting that several figures – including Traxis Partners’ managing partner Barton Biggs, and Barry Knapp, head of US equities strategy at Barclays Capital – are “not fazed”.
These investors are “not 25-year-old talking heads”, Bewley says, but have been around long enough and have enough experience to better understand what is going on and how it may play out.
Now is not the time for the faint-hearted.
“If you feel sick, do not buy,” Bewley says. “I would say it would be worth putting a bit in today, but you would not want to go in holus bolus.”
Business and finance commentator Peter Switzer says “the most important headline I have read today is ‘Lowest point in 10 months’”.
“That means we were here 10 months ago, and for the same causes: Euro debt, and will the US go into recession?” Switzer says.
“That’s the point. We’ve dodged the ‘next Great Depression’ bullet, and so we are now caught in this up-and-down, sideways [market] for a few years, until we are certain the worst is behind us. And the worst is not behind us – it’s with us.”
Switzer says markets are currently being battered by a perfect storm of economic factors. But on a rational analysis of the situation – free from the short-termism and panic that characterises today’s thinking – the outlook is far more benign, with some sober analyses nominating a “natural” level for the S&P 500 Index of 1600 points or higher (at the time of writing the index was at 1119 points).
“From the point of view of a self-managed super fund investor, if you’re in great quality shares or managed funds, I’d be prepared to say let’s ride out this storm, because we’re in a perfect storm,” Switzer says.
“Put it all together, it’s a perfect storm. It explains what the market is doing. But bit-by-bit, and piece-by-piece…the worst of this fall will come back.”
Investors should expect further share price falls because economic fundamentals are being overridden by “panic,” says Ron Bird, professor of finance at the University of Technology Sydney.
“In times like this valuation means nothing,” says Bird, who is also director of the Paul Wooley Centre for the Study of capital market dysfunctionality.
“During the majority of time, valuation only plays a small part in equity markets.
“It’s either optimism or pessimism. We slip from one extreme to the other.”
Bird expects stock markets to fall further. But he won’t pick a bottom. That is foolish, he says. But he says stock markets are too expensive.
“Equity markets in general are over-priced,” Bird says.
“People who say ‘be patient’ are inadequate. What they’re saying is, ‘I’m hopeless. I don’t know what is going on’.”
Bird believes excessively optimistic reporting by the news media has helped skew markets beyond their fundamental value.
“No one wants to sound pessimistic,” says Bird, who has worked at Towers Perrin and Westpac Investment Management. “TV has distorted our judgement.”
Bird says markets are going through a third plunge related to earlier market crashes: the Internet bubble and the credit bubble.
“We’ve overspent for 25 years and you don’t get out of that in a blink of the eye,” he says.
“Greenspan was the worst central bank in living memory. He ran markets as part of a popularity contest, giving them excessive liquidity.”
Australian stocks are attractive and market returns, from dividends and earnings growth, may be as much as 15 per cent in the next year, says Paul Taylor, head of Australian equities at Fidelity Investment Management (Australia).
Taylor says the Australian market is currently very attractively valued at about 10 to 11 times earnings, and a 5 per cent dividend yield. Australian stocks have historically traded at between 14 and 15 times earnings, he says.
“It is hard to see the Australian market” trading at 10 to 11 times in the next year, Taylor says.
