Daily : At The Moment News
8 January 2016
The rout in global equity markets continued overnight as the Chinese equity market was placed into a trading
halt for the second time this week, and the oil price touched a new 12 year low of US$32 a barrel. This saw
markets fall across the board, with energy and resources stock being hit particularly hard. As mentioned
yesterday we remain focused on bigger picture and continue to have a positive medium term outlook,
looking through the current noise in markets. Periods of extreme market volatility can be testing for even
the most experienced investors. However it is important to separate the fact from fiction. Long term
investors should focus on importance of investing in high quality stocks with solid business models. In today’s
daily we discuss our portfolio positioning and reiterate our views on Air New Zealand (AIR.NZ) which has
been a major beneficiary of a lower oil price.
Remain Calm
Why Markets Are Falling
Following a Christmas rally, the Australian market has fallen -5.4% so far this year following global moves.
The sell-off has been driven by renewed fears around the strength of the Chinese economy, and given
Australia’s reliance on China as a trading partner parts of the market have been hit particularly hard. As
we mentioned earlier this week we believe the sell-off is excessive and are looking for opportunities to buy
quality stocks at cheap prices.
Portfolio Positioning
We have been wary of materials and energy for some time given the problematic supply and demand
imbalances the sectors currently suffer from. These sectors have been hit hard in the recent selloff. We
are significantly underweight these sectors compared to the general Australian market index (ASX 200) and
currently only hold one mining stock, and hence only 5% of our portfolio is invested in these sectors, while
the general index is comprised of 18.2% of these stocks. That means our portfolio will significantly
outperform/beat the general index on moves similar to what we are currently experiencing.
Further, our portfolio currently has a portion of its holdings held in cash. It is better to hold cash when
the market declines as this insulates our portfolio performance when the market is declining. However,
given our outlook on markets we are now looking to take advantage of the recent price declines and make
further investments for our portfolio. By purchasing high quality stocks with sound business models in a
declining market, it helps to ensure that we have low entry points on our investments.
Don’t Panic – Focus on the Big Picture
Periods of extreme market volatility can be testing for even the most experienced investors. But it is
important to separate the facts from fiction. Long term investors should focus on importance of investing
in high quality stocks with solid business models. There are still a lot of opportunities to make money in
falling markets, but investors need to be smart and understand what factors are driving the market moves.
Agriculture is a key thematic in our model portfolios and it has held up impressively despite the general
market collapsing. This is because the long term economic drivers for the outlook of these stocks remain
strong, hence there is no need for the share price to correctly materially.
Investing success is achieved over the long term and selling shares out of panic is likely to hinder your
performance. Stay calm, think rationally, and maybe even look to put some more money to work while
shares in high-quality businesses are going cheap.
Chart of the Moment:
We hold stocks in our portfolio which are benefiting from the fall in commodities. An example of this is
Air New Zealand. It continues to climb despite the general market fall as lower oil prices are advantageous
for the company. Further, we believe the stock has a solid business model and is set to benefit from further
growth in New Zealand tourism.
Five Things Markets Will be Watching this Week
1) How global equity markets will trade in the first week of the year, and particularly whether they
can reverse recent losses.
2) Chinese manufacturing data has recovered somewhat of late, and further data will be released
early this week.
3) US employment data will be released later in the week, and the market will look for continued
strength to support further interest rate hikes by the US Fed.
4) The Oil price – whether the free-fall in the oil price will halt or reverse will be important for both
energy stocks and market sentiment more generally
5) Dairy prices will be released early in the week, with a recovery important for several agricultural
stocks held in our portfolio.