While the Australian market is going through some tough times at the moment, there is no clear catalyst for that to change according to Paul Moore, Chief Investment Officer and founder of boutique fund manager, PM CAPITAL.
“The September quarter showed that the market status has come to an end, and that going forward the price movements will be very different from what we have experienced over the last couple of years,” he said.
“The big movements have been commodity prices which have come off hard, and the stronger US dollar,” said Moore. “Commodity prices have been correcting since about May.”
“We see iron ore prices at the forefront of all discussions, but what most people might not realise is that it is right across the commodities spectrum; corn and wheat in the agricultural commodities have fallen 30 to 40 per cent over the last three months and towards the end of the quarter oil joined in and finally crack through $100. Oil is now its trading at about $85, off about 30 per cent from its highs.”
“We believe this is just a reflection of slowing Chinese demand,” he said.
“The falling A$ currency is showing that there is better relative value in stocks overseas and investors should be moving their equity investments offshore.”
“We still believe the A$ is overvalued by about 10 per cent relative to where commodity prices are at the moment but the timing of the next move will be more difficult,” he said.
“Any extra movement will require a movement in relative interest rates, a stronger US economy which will lead to a rates rise in the US.”
Moore warns investors about the dangers of certain investments, even if they are popular, such as investing in apartments.
“We try to remind people that an apartment has an effective yield of around one per cent after costs, if you are lucky, and with the Australian dollar in the high eighties, you can be buying stocks offshore with strong earnings growth potential that will also benefit from any further currency depreciation.”
Moore said it has been difficult to work out what has really been going on over the last three months when the Australian equity market has been looking very fully valued.
“Our instinct is that the overall economy is flat line, it is just going sideways,” he said. “We either need the commodity impact to wash through so that it is no longer a drag, or some external stimulus from offshore.
“Valuations relative to the earnings growth and economy outlook provides a very average risk/reward, which is why we are telling investors to go offshore.”