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A bullish view on markets using charting

Photo of Alan Hull By Alan Hull

min read

I think markets are going to continue to go up, worldwide. Central banks continue to play their part by maintaining their quantitative easing programs and keeping downward pressure on interest rates. So much so that Japan and Europe have negative interest rates.

This means investors are better off investing in riskier assets than leaving their money in the bank. Hence I’m a bull and I believe global equity markets have now begun the third rally of the bull run that started from the low of March 2009.

Bond markets are also strong and so are many property markets around the world. This is called an asset inflation and it’s a wonderful thing if you are on the right side of it.

But here’s the qualifier: this is the third rally and therefore the ‘lemmings phase’ where fundamentals do not mean a great deal. Value investors are finding the going tough at present as valuations are stretched and it’s time to look past the financial ratios in favour of price charts.

My hunt for growth stocks is very much about searching for some ships that will definitely float on the rising tide. What better place to look than among the big wealth management companies that obviously have their fortunes directly linked to the state of the sharemarkets. Chief among them on ASX is AMP, BT Investment Management, Magellan Financial Group and Platinum Asset Management.

From a fundamental perspective I consider these companies to be reasonably sound and under good management, in broad terms. Although when I look at their price charts, there is an odd man out. Can you spot which one? The charts are monthly and go back to March 2009, the start of the current global bull run.

(Editor’s note: Do not read the following ideas as stock or sector recommendations. Do further research of your own or talk to a licensed financial adviser before acting on the themes in this story. This story was prepared just before Britain’s decision to leave the European Union. Some Australian wealth management stocks with exposure to the UK economy fell after the referendum.)
 

 


 

 


You can clearly see that Platinum Asset Management has not enjoyed the same meteoric rise as either BT Investment Management or Magellan Financial Group, but has still doubled in price since the start of 2009 while paying a very attractive dividend. AMP is the odd man out for me, as it has only risen about 16 per cent from its low in early 2009.

I suspect the reason is because AMP is an insurance company as well as a wealth management company. Look at the following sector charts and it is a stark contrast. The insurance sector is looking like a ship without a sail, while diversified financials have more than doubled over the past several years.
 

 


I’m inclined to leave AMP out of the equation and capitalise on this sector utilising just the other three. Of these three, Platinum Asset Management is the weakest performer in terms of share price performance. I would speculate that the principle reason is that its investment mandate is to seek out under-valued assets rather than index tracking. Put another way, it leans towards bottom-up stock selection rather than top-down trend following.

Because this is not a market for value investors, Platinum’s investment mandate is somewhat out of step with current circumstances. When markets are depressed and stocks have been oversold, you want to seek out under-valued companies.

Ideally, this is what you would want to do at the market’s low points, such as early 2009 and 2011-12. Have another look at how rapidly Platinum’s share price rose out of these two periods. But the share price then falters as the market begins to trade on a premium.

This mandate clearly has merit much of the time and also serves as a hedge of sorts, so I’m inclined to leave Platinum Asset Management in my selection. Furthermore, its dividend yield is attractive, albeit a secondary consideration. These three stocks serve as a proxy for the broader bull market, where Platinum provides a diversification of mandate. And combined, these three have comfortably outperformed the broader market since 2009.

The investment philosophy I have employed here is to follow the trend. I am bullish on the broader market, and the wealth management sector is a direct beneficiary of a rising sharemarket. I have narrowed my focus down to the best-performing shares within this sector. This approach is best employed when markets have departed from fundamentals and are trading on a premium. This is the case now for our sharemarket, as it is for many world markets.

But there is a counter argument to owning these shares on the basis of the recent changes to superannuation, in particular the contributions caps that may lead to capital inflows of super money drying up. Furthermore, the ageing baby-boomer population means more people taking money out and fewer putting it into their retirement funds.

These points have merit but I would suggest they are longer-term factors that will not have a great deal of impact in the next year or two. I’m a short to medium-term bull and believe these diversified financials are one way to catch the rising tide.

 

About the author

Alan Hull is one of Australia's leading stock market experts. Go to www.alanhull.com where you can enroll in Alan’s free online investment and trading courses.
 

From ASX

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The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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