markets have been very calm and we have now seen a 35-day streak of market calm without a daily move of more than 1% in the US stock market index. While August is generally quiet given it is summer vacation in America, this is the longest stretch of low volatility since the 2014 summer period. So the question is, is this the calm before the storm? We reiterate our outlook for the reminder of the year and discuss the importance of active management in protecting against downside losses below. Locally investors continue to digest the current earnings season, as the market looks for stronger profit results to support recent share price gains. Costa Group Holdings (CGC.AX), which supplies fruit and vegetables to the supermarket giants, reported a strong 2016 financial year result, beating its prospectus expectations by 4%. High demand for key crops in Australia and strong berry growth and citrus exports overseas have helped Costa Group record a 29% rise in net profit after tax to AUD$49.3 million for the 2016 financial year. Costa presents an attractive way for investors to gain exposure to the “dining boom”. It benefits from the constant and growing demand for food globally as well as being attractive to health conscience consumers.
Calm Before the Storm?
The current streak of market stability represents the longest period without a 1%+/- daily move in the US stock market since the summer of 2014. After what was one of the worst starts to a calendar year in terms of share market performance, markets have bounced back and shown quite amazing resilience. The Australian market (measured by the ASX 200 Index) is sitting just below highs for the year, while the NZ market (measured by the NZX 50 Index) is sitting just below its all-time high. So the question remains, what is the outlook for the rest of the 2016?
There is always a chance that a left tail risk may appear over the course of 2016 which was unexpected, and derail the course of markets. However, the key foreseeable risk, which we have noted in the past, is US political risk, as there will be a new President of the United States in November this year. One of the arguments used to explain why Britain recently decided to leave the European Union is that it represents a tipping point towards populism in the Western world, and this also explains the rise of Trump in the US. The remarkable rise of Donald Trump could cause more market jitters, given his extreme policy comments. Given Hillary Clintons more mainstream policies, she would be the best outcome for markets, in our view. These political trends are likely to continue to create uncertainty in 2016 and we will be watching developments for their implications on markets.
We are cautious in broadly buying stocks given the high levels markets are trading at, and our view that a downward correction could occur in the latter part of the year as highlighted above. During periods of low volatility, stock picking is challenging as returns are not as widely dispersed. However, the value of active stock investment (versus passively buying the market) is not only limited to “stock picking” (buying certain stocks on the view that they will perform well and better than the broader market). There is an abundance of research which suggests that the true value of active management comes from avoiding downside losses, which over time greatly enhance overall portfolio performance. are firm supporters of this view, and we are not afraid of moving holdings into cash in the appropriate situations.
Overall the question remains – how long will the relative calm in markets last, and we reiterate that we remain selectively positive, holding what we believe are quality stocks which are reasonably priced and set to benefit from strong economic tailwinds.