The buying game

For those with a steady nerve – or a long-term point of view – the decline in global markets may be less of a worry and more of an opportunity. Here’s a range of views on bargain hunting in the current market.

The bargain hunter’s view

Share prices both in Australia and overseas are now dramatically cheaper. The Australian share market is down 20% since November (as measured by the S&P ASX 300 Accumulation Index to the end of March 2008). And the global share market is down 13% over the same period (as measured by the MSCI).

When shopping for a car or a TV, a fall in prices makes the object look more appealing. However a fall in share prices tends to make investing less attractive. Why is that the case?

Understandably — but not logically — investors conflate the returns on money they’ve already invested with the risk and return potential for money they have to invest now. Yet the two are clearly distinct. Any loss (or gain) made on previous investments has absolutely no effect on any ‘new’ money you may be looking to invest.

What you need to consider is the potential return on your new investment. Could it be affected by the same economic and market conditions that caused recent market falls? If so, does it make sense to be cautious? Perhaps, but those factors are now priced into investment markets. You get to buy shares at lower prices because the market is already taking those risks into account.

It’s also important to remember that the conditions that forced markets down (eg the ‘credit crunch’ of the past six months) may be losing their impact, or overtaken by other factors such as the large interest rate cuts we have seen in the US.

As the article on page 10 points out, it is tremendously difficult to separate emotion from investment decisions. Yet taking the opportunity presented by lower prices can make it easier to achieve the investment returns you need to improve your lifestyle.

The stock-picker’s view:

Crispin Murray, Head of Equity Strategies, BT Investment Management

In the past six months the Australian share market has snatched back a large chunk of its previous gains, gains that in many cases were driven by ‘cheap’ money and a booming global economy. Now those factors have turned, a credit crunch is biting and there’s increasing evidence that the US economy is weakening.

Many companies that prospered in early to mid-2007 — companies with business models based on rapid expansion fuelled by cheap money — are being hammered as that model unwinds. BT funds paid a ‘performance price’ in 2007 for not investing in those companies. But that has helped insulate our funds now that the ‘tide has turned’.

We are now at a very interesting point. The recent profit reporting season showed no evidence of a significant deterioration in companies’ operating environment. However there are negatives out there, tightening monetary policy and slower growth being the most obvious, while a rising dollar makes life hard for Australian exporters.

We are at a point in the market cycle where significant value is emerging, but where short term earnings uncertainty is extreme.

So, a long term view is vital. You have to be aware of the risks, but you need to understand what you are being paid to take such risks. With the market expecting the worst, you can be well compensated for risk and that’s why we are selectively buying into companies that have been over-sold.

There are opportunities across different sectors, but our preferred targets are companies with good market positions, strong balance sheets and proven management. We continue to place a premium on liquidity so companies like QBE, Rio Tinto, Qantas and Origin Energy have been high on our list of attractive buys.

The super investor’s view

Thanks to some significant new tax concessions, vast sums of money were poured into superannuation in 2007. Those tax changes effectively made income from super tax-free after the age of 60 and confirmed super’s position as a premier long-term investment.

Recent market falls have obviously dragged down the value of those super investments. According to SuperRatings, the 2007/2008 financial year could be the first negative return for balanced super funds since 2001/02.

So how should super investors react? As we have discussed above, in the midst of market turmoil there is a temptation to avoid investing your super in shares. Yet super is explicitly designed for the long-term and as our article on page 8 shows, over the long term, share market returns more than make up for the occasional negative year. If you’re investing for a retirement that is years away, investing in shares offers the potential of more attractive returns than most other asset classes.

Indeed a combination of improved tax concessions and lower asset prices may now make share-based super funds a classic buying opportunity.

The economist’s view:

Dr Chris Caton, Chief Economist, BT Financial Group

The negatives in the current economic environment are now so well known there is no point enumerating them again. The most important factor is the US recession. However I can confidently assert that the US will come out of the recession it is now going into. There are three factors driving this forecast:

This US housing collapse (which helped start this whole downturn) cannot keep getting worse.
The fall in the US dollar has been so steep it’s now adding real legs to America’s export performance and that’s good for US growth.
The Fed is on the job, injecting serious liquidity into financial markets and cutting rates dramatically.

What does this mean for investors? The big issue is the length and depth of the recession. If it’s a mild one, it may already be priced into markets and we may be nearing the bottom. Picking turning points in an economic cycle is notoriously hard. Yet, investors who have ridden the market down should assess whether bailing out now means avoiding only the last leg of the road down, but missing the traditionally large early surge when a recovery arrives.

It is valuations that should give investors most comfort, especially if they have cash on hand. Research I’ve been looking at suggests that in Australia, price to earnings measures are saying that the last time shares were this ‘cheap’ was in 1990. P/E ratios on global markets are now the lowest they’ve been since 1990.

Investing	Markets and performance
Tough times: 3 fund managers in the hot seat Catching the 'bounce back' - a message from BT's CEO Rules for investing during volatile times Long-term investing - more than a mantra? Bulls and bears: Chris Caton on investing in 2008 Investor behaviour: that sinking feeling Managing your margin loan in a volatile market The advisers' view The buying game	Candid Caton Markets update - October 08 Markets update: rough ride for investors Update on financial markets for September 08 It's been a big week on Wall Street Markets and performance - August 2008 Markets and performance - July 2008 Markets and performance - June 2008 Markets update: Aust. share market dips again Markets and performance - May 2008 Markets and performance - April 2008
Economics: Caton's Corner	Superannuation
The worst month, the best week Somewhere we've never been before The plot thickens Who would be an economist? What's going on? Did something happen in mid-July? When will this end? Happy New Financial Year? Interest rates steady (for now) and oil continues to rise Nothing but blue sky ahead? The economist's view	Super returns in perspective How the markets and our funds have performed Adviser tips for your super Simple super strategies Who will inherit your super?