September 2015 Review & Comments
Written by Tony Gray   
Friday, 23 October 2015 14:44

Market Volatility – opportunity or threat?

The Australian sharemarket finished September at levels not seen since 2013 – when the market was trending higher from the market lows of 2011 and 2012 (those lows occurring through fear about a European debt crisis and potential second financial crisis).

Thus far in October there has been a bounce in share prices – so the big question for investors is ‘does this represent an opportunity to buy or to sell?’.

This leads on to what exactly to buy or to sell?

We are of the opinion that buying or building an index related portfolio is foolish.  While references to ‘the market’ or the index so far as lows or highs or trends can be useful, at the end of the day we recommend management of portfolios through the addition or removal of individual assets.  While not ignoring larger macroeconomic events and risks, these can be dealt with to a degree through money management –by not over exposing to particular businesses and themes.

A classic example at this time is the very high weighting to banks and financials as part of the index and share component of a typical Australian share portfolio.  Bank stocks now pay very healthy income yields and look cheap on current earnings.  If you have no exposure to banks in your portfolio, then adding some parcels may be considered.  However, most established portfolios do have a decent exposure to banking and financial stocks.

While current income from bank stocks is attractive, it is derived primarily from the lending of ‘other people’s money’ – but any money lost comes out of shareholder equity.  There is a ‘fat tail’ risk from the banking sector that increased bad and doubtful debt provisions in future could see significant shareholder wealth destruction.  Whilst we don’t at this time consider this likely, the potential consequences could be severe.  For this reason, the prudent course of action is to diversify into other sectors and assets to limit risk. 

Australian Shares

The dot points below spell out my broad view – which will vary from portfolio to portfolio and individual positions and goals.

Most selling on a stock or sector specific basis has already occurred, so a general market bounce does not necessitate selling in my view.  The one potential exception to this relates to the banking sector.  Should we see a sizeable recovery in bank stocks a re-appraisal (if they represent a meaningful part of your investment portfolio) is warranted.

  1. Mining and energy stocks have been sold off to very significant degrees.  The risk of each holding varies dramatically due to different costs of operations, mix of commodity exposure and balance sheet strength.  A modest exposure in portfolios is warranted – with a range of incomes and/or recovery potential on offer.  Note that this comment is from the viewpoint of portfolios having had very little exposure to these sectors until recently.

  2. Non-core stocks.  We have seen very significant price falls – generally from about February 2015 peaks – at which time many stocks were very optimistically priced.  Price falls between 30% and 50% have not been uncommon across a range of companies and have been sufficient to bring them back to worthwhile or attractive valuations.  Examples of stocks include (SEK) - the employment website and Retail Food Group (RFG) – owner of a wide range of franchises.

As most portfolios are carrying larger than normal at-call reserves it is reasonable at current valuations to apply some funds to long-term purchases.  Income yields are generally quite attractive relative to at-call and deposit rates and it is possible to add an interesting mix of businesses.

Should the market revert to down-trend, then there will be more opportunities to put surplus funds to work.

There are some select opportunities in the property, international and fixed interest sectors that may fit your portfolio.  We do not see these as urgent adjustments and intend to cover as we conduct portfolio reviews.

At times of higher volatility, prices can fall and then bounce quite rapidly – moving into and out of value.  One disadvantage of running individual portfolios is that opportunities can be missed – but our view is that better this than treating all portfolios identically – which essentially disregards individual investor views.

This is why I encourage contact from you.  If you are concerned that your portfolio is not positioned defensively enough, or conversely feel that you are comfortable applying some excess at-call monies to work, then please make contact.  Otherwise we will continue to progressively review portfolios and be in contact with recommendations.


Best wishes,

A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin

Principal, TG Financial

Please treat the above comments as General Advice or general information, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Friday, 23 October 2015 14:57

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