The past three months have produced solid gains for investors in the Australian sharemarket. But now what?
Full In Focus feature, A time to buy and a time to sell, is available here
Making money in equities is simple. Buy low, sell high, and that’s pretty much all there is to it. But this slightly facetious view overlooks two fundamental questions: What is low? And what is high?
Right now, more investors are wondering what is “high”, after a three-month period in which the performance of the Australian sharemarket has been pretty solid. Knowing when to buy a share is only half
of the equation. The other half is knowing when – and having the discipline – to sell. A share price on its own is an indication
of nothing more than the price the share last traded for. To assess whether a price is “low” or “high” you need what Roger Montgomery, founder of Montgomery Investment Management, describes as an “anchor”.
That anchor, for many investors, is the intrinsic value of the company, and its shares. Only if an investor knows what a share is worth – its value – can they assess whether it’s underpriced or overpriced. “The most important thing that I can probably say is, don’t take your cues from price alone,” Montgomery says.
“Don’t let price determine your behaviour. It’s got to be price in relation to an anchor, and that anchor has to be value.”
Nathan Parkin, portfolio manager for Perpetual Investments’ ethical and socially responsible equity strategies, says a focus on the factors that determine the value of a company can help investors avoid the common mistakes of buying at the top of a market and selling when the price is depressed.
“What’s really important when markets are diving or rallying is to have a process to stick to, first and foremost,” Parkin says.
“We have four things that we stick to, and they include: we see management; we look at balance sheets and we have specific criteria around that; we look at the quality of the business; and we also look at recurring earnings.
ALL ABOARD?
Research released by CoreData during March revealed that investor sentiment towards Australian equities had hit a two-year high, driven by the performance of the sharemarket since November last year.
Retail investors being what they are, it’s likely that this improved sentiment will translate into higher fund inflows – and if past history is any guide, that will happen close to what turns out to be a market peak.
In the second quarter of 2012, the investor sentiment index stood at -25.9. By March 2013 it had improved to 11.0 (see graph).
The research found that even though sentiment had improved, the likelihood of investors moving money into the market any time soon had not changed significantly.
But it noted that investors “may need yet another quarter or so of positive momentum in equity markets before they make such a move”.
“We do believe, however, that the reasons for maintaining large allocations to cash have changed – where previously this was due to investors simply being risk-averse, they are now parked, waiting for the right opportunity to stick their heads out,” it said.
The accompanying graph, which overlays the CoreData sentiment index and the S&P/ASX 200 Index, shows how sentiment and the value of the equity market index tend to move together. If the market continues to rise in the second quarter of 2013 and beyond then investor sentiment can be expected to improve considerably, which may be the trigger to invest.
The CoreData index is an aggregate of investor sentiment, market expectations, household financial security, investment satisfaction and intention.
Almost half (47.7 per cent) of the respondents to the CoreData survey said they believe equities will outperform the property markets in the coming quarter, and more than half (53.1 per cent) said they believe that the market for direct Australian equities will be better for investors in the June quarter.
