Remain Calm – What You Should Do Now?
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.
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.