‘I’m avoiding stocks.’
About 18 months ago, when I returned to New Zealand, several people said this to me.
‘The market is way too high. We’re due a correction.’
Subsequently, the NZX 50 Index rose over 26%. Gross dividends likely kicked in a further 5% per annum.
Nick B, thank you for your kind comments on my Kiwi Homeowners article.
I get your question a bit and wanted to address it.
‘Share investing makes sense as an alternative investment, but how can I reconcile this with my sense of an impending correction?’
I’m taking ‘correction’ to mean a market crash, where indexes fall 20% or more.
The last big correction we experienced was the Global Financial Crisis in 2008–9. The Dow tumbled some 40%.
Yet, the market recovered. It’s gone on to rise over 300% since.
Invest in great companies at good value, not the market
I don’t think you can time the market. A market crash generally follows a series of catastrophic events.
Nobody fully predicted the credit meltdown, the bankruptcy of Lehman Brothers, or the bank failures and bailouts.
Today, nobody can predict what North Korea will do. How China will respond under trade pressure. Or if threatened on Taiwan, or in the South China Sea.
We don’t know when inflation will gather steam again and force a change from the low interest rate environment. Devastation from global warming and the speed at which it may occur is still uncertain.
While the market indexes were scathed in 2008–9, certain companies bucked the trend.
Tax preparation giant H&R Block [NYSE: HRB] rose 20%. Walmart [NYSE: WMT] was up 17.4%. Car-parts retailer AutoZone [NYSE: AZO] was up 18%.
These companies have secure, repeat businesses. Investors bought them at good value. They had nothing to fear from an ‘impending correction.’ In fact, they enjoyed capital growth and some dividend income amidst the crisis.
So, when do you not buy?
I have a simple rule. If I can see clear value and opportunity in a business — no matter what the market may or may not do — I will buy. And I’ll hold it through thick and thin over many years — unless the business case changes.
It is true — it’s a struggle to see value opportunities on the NZX today.
Most of my recent buys have been in Europe where, from time to time, value seems to be available. Sometimes Australia or Singapore. The US — before our currency became too weak against theirs.
Of course, a major correction can mean some stocks become available at great value. But not always. During times of correction, I’ve watched favoured companies, looking to get in, only to find these unique opportunities increase in price during the correction.
For example, the FTSE in the UK has not fared well through the throes of Brexit. You would think this is a great time to top up on leading pharma company Astra Zeneca [LSE:AZN]. Against the Brexit hammer beating down the wider market, Astra’s price has increased. Investors see the wide export base as a defence.
Will there be a correction?
In the back of my mind, there’s always that chance.
So my portfolio has a significant defensive allocation. And there’s margin available to buy opportunities a correction may bring about.
But in some areas, I’ll get hurt. As will anyone with risk assets in the market. And then we’ll have to wait for things to get better again.
Right now, we seem to be in a long-term, buy-and-hold bull market — the longest on record.
As the fund managers warn, the past is no prediction of the future when it comes to investing. We don’t know what may happen. We don’t know when the bull will die.
The threats are conflict escalation with China or North Korea. A sudden turnaround on interest rate policy. Italy exiting the EU. Reversals of US tax cuts. Jeremy Corbyn coming to power in the UK. And there are many more at both the local and global level.
Yet many analysts see the buy-and-hold bull market continuing onward and upward. Which is why it’s always good to be invested in great companies for the long term.
There are clear reasons for this long run buy-and-hold bull:
- In developed countries, more people depend on unearned income than ever before. When stock prices dip, pension funds jump in. How else are they going to provide you retirement income?
- On the flipside of this is the post-GFC approach to fiscal management — very low interest rates at central-bank level in order to keep our mature and ageing economies on life support. So investors must look to risk assets like stocks to achieve any meaningful return.
- Company earnings are going OK. Trump tax cuts and deregulation fuelled them in the US. And there are signs that other major economies will use this approach.
- US and other developed job markets continue to hold up well, with record low unemployment. Meaning people have money to spend at the businesses you invest in on the stock market.
What about New Zealand?
Here in NZ, our job and housing markets are looking more precarious. While the US is cutting taxes, reducing compliance, protecting innovation and creating jobs — our government is asleep at the wheel.
We’re making it more difficult to do business. Compliance is our fast-growing industry. And we have plenty of ex-high school prefects in jobs where they can continue issuing detentions. Too many pricey lawyers. Not enough innovators.
Last year, we dropped seven places on IMD’s global competitiveness scale to 23rd. The US returned to 1st.
But our market may still do OK, because we provide some haven against world volatility. And, ironically, the state of the NZX — which appears expensive and difficult to list on — means most of the companies there are large and monopolistic locally, throwing out reasonable dividends in global terms.
You just don’t want all your eggs on the NZX. The basket is too small.
If you’ve invested well and at value, an ‘impending correction’ is not something that should keep you awake at night.
Example: I’ve owned shares in Auckland International Airport [NZX:AIA] for many years. Whether the market is running a bull or screaming a bear, it’s the same business. The same property assets. Much the same dividend yield. The same long-term growth outlook as Auckland continues to expand.
Right now, the business looks fully priced to me. Would a bear pull it down to a level that it’s cheap enough for me to top up? Not so sure. The slightest dip these days and you see big funds buying up. BlackRock took a big chunk of AIA in January.
Fortunately, there are still opportunities elsewhere. Distress brings value. But it’s getting harder.
Regret is worse than fear. I regret not buying more shares in great businesses when I could have — because I feared a correction. Now many have got away on me.
One thing I’ve learnt. You can’t control or time the market. But you can hone your research skills and business intuition — so regardless of the noise, you know when a share represents value.
Analyst, Money Morning New Zealand
Simon Angelo owns shares in Astra Zeneca plc [LSE:AZN] and Auckland International Airport Ltd [NZX:AIA] via wealth manager Vistafolio.