FYI | Nov 18 2015
By Peter Switzer, Switzer Super Report
Last week, it was the Brazilian tragedy and now the inhumanity that was Paris over the weekend has us thinking about the real importance of many things that we consider important. However, I do have a job and it’s to give guidance to my Switzer Super Report subscribers and financial planning clients, and so that’s what I will do.
It’s no surprise that many of us are getting tired of this stock market. The chart below tells a tale of tedium but it does give us a clue about what we should be investing in.
Look at the slope of the line between 2003 and 2008. It was steep and ended with a crash. Coming out of the GFC stock market slump, 2009 was a ripper, which we tipped and this was based on history after crashes.
Since late 2011, our market has struggled between 4000 and 5300 but we did see 5996.4 on April 13, so there was a time when all the things that drive share prices — local and external — pushed us to this heady level and those drivers will reappear, probably over the next 12 months.
It makes me even more jumpy to buy stocks now when I see the AFR scare some of us with the great headline “Biggest blue chips bring down ASX”. The top 20 stocks have lost about $170 billion in market cap, following a 17% decline.
But while this, like most newspaper headlines, are meant to scare the pants of us, this one made me think of Warren Buffett’s “be greedy when everyone is fearful” and this looks like a perfect time to take Wazza’s advice.
Sure, Woolworths and BHP have company specific matters to deal with, aside from the sector challenges of low commodity prices for the latter and increased competition for the former but you have to ask: “Are these problems going to KO these companies?”
It seems to be the answer is ‘no’ and things will change and so provided you don’t have to look like a fund manager genius within three or six months, then time is on your side.
It’s especially so if you’re a dividend lover and, on current returns, most of these companies annual hand-backs to shareholders could halve and you’d still be doing well and especially so compared to term deposits.
On BHP, its gross yield is over 8% and even if the dividend is halved, it would still be 4% but CEO Andrew McKenzie has said the dividend won’t be reduced, but he hadn’t factored in the Brazilian dam problem which in any event, may still be covered by insurance.
So let’s leave the dividend issue and ask where the share price would be in one-two or three years’ time?
My best guess is that the world economy recovers over that time and copper, iron ore, coal, oil and everything BHP sells becomes a little dearer. That says to me that betting on BHP being higher than $20.23, where it finished on Friday, should not be too big a stretch to believe in.
Meanwhile, ANZ and NAB are yielding almost 7% on current share prices and this just when we received those great job numbers, where unemployment fell from 6.2% to 5.9%. These came just when the RBA has told us that it expects the September quarter to be good for growth and it comes as three out of the seven economists I surveyed saw 2016 growth at 3% or more. The other four were 2.6% plus and none of these had seen the October job numbers when they gave these forecasts.
Our dollar is producing growth and as we grow faster, do you think the big four banks won’t be beneficiaries? Yeah, sure.
On Thursday, Charlie Aitken built the case to go long Telstra and he doesn’t need me to add to his argument. Woolies is a different kettle of fish and I would like to give it some time to find a CEO, make some tough decisions and come up with a credible marketing plan. It will, one day start heading back to $30 but it could take two to three years, or even more.
When fund managers are asked about companies such as the banks, they will adopt a view that is relevant for the next six to 12 months but if you can wait longer, then these companies remain good plays for income first but later capital gain.
Okay, I know there will be better companies, especially for capital gain — so you pick them!
Yep, my experts have done a great job identifying these companies but they’re not often great dividend players and their gains can be for a few years, so you have to be aware of that.
At current prices, I think it’s hard to make a blue with a collection of good blue chips.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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