Trillions buy a little time

By Tony Featherstone, journalist

Trillions of dollars of government assistance to contain the global financial crisis and stimulate economies have added up to about 15 minutes progress on the investment clock.

ASX Investor Update asked several experts to comment on the investment clock, a widely used indicator for understanding the movement and conditions of finance, property and sharemarkets.

We last looked at the clock in the March issue of ASX Investor Update, and return to it three months later as part of a regular quarterly update on the clock and associated trends.
Here is the clock (sourced from Paritech) for those who missed it last time:

Most experts believe the clock is still between 7 (falling interest rates) and 8 (rising share prices). Where they differ is the amount of time it will take to move between the two.

Alan Kohler, in this month's top story in ASX Investor Update, is one expert who believes the Australian sharemarket could trade sideways for several years after the bear market ends, with little prospect of significant capital gains.

Others, such as the trading author Alan Hull, believe the market could test or make new lows later this year before staging a sustainable rally. Dale Gillham of Wealth Within believes the bear market is at least half over.

Always remember that there are many different views on the market and that the majority of forecasters have misread the market in the past two years.

What matters most is economic and company fundamentals. On this score there has been some progress in the past quarter and some progress made on the investment clock.

Government actions to contain the global financial crisis appear to be working, although the threat of another leg in the crisis still remains. The rate at which banks lend to each other, for example, has fallen in the past quarter, creating hope that banks will repair their balance sheets and stimulate economic activity by lending more.

Pushing the clock forward slightly have been more so-called "green shoots" in the past quarter as the rate of economic deterioration in some countries declines. To be sure, the global economy is still recessed and it could take another 12 to 18 months at least before Western economies emerge from their funk.

A sharp rally in global sharemarkets since the March lows has also given cause for hope.

Experts interviewed by ASX Investor Update are still taking a defensive approach and generally expect more pain this year before markets stage a more sustainable rally.

Rather than focus on the overall market, ASX Investor Update asked the experts to comment on a particular sector. That is because while part of the investment clock suggests "rising share prices", the reality is that different sectors will rally at different stages in the next upturn.

And there are "clocks" within the investment clock: for example, property consists of many different types of listed and unlisted property at very different stages on the investment clock. The stock ideas mentioned below should not be read as recommendations, but rather an indication of how the experts view different sectors.

Here are the expert views:

Dale Gillham - Chief analyst, Wealth Within

Sector: Banks

The business cycle or economic clock is moving forward, and I believe we are at least half way through the current bear market and possibly into the second half. If we break down the bear market into their phases I believe we are now in the middle phase, having completed the early stage in March 2009. Therefore we have moved on in terms of the economic clock. 

The banking sector has only been up so far for five or so weeks (the most significant rise since early 2008) and has been trading sideways for the same time below resistance around the 50 per cent level of its all-time high. Provided it finds support between 3200 and 3500, we can expect another run up for the index to around 4250 to 4500.

Alternatively, we could see it come back to test support from March 2009 lows. Statistically the banking sector, along with insurance, financials, and oil and gas, are the worst performing sectors in both the middle and late stages of bear markets. The next significant low for the sector and the S&P / ASX 200 index is expected into July and September this year.

Fundamentally, historic trends indicate that although bank revenue grows strongly into a recession, this is short lived and the trend reverses toward the end of a recession. For example, in the 1990s recession asset growth was 7 per cent ahead of long-term averages leading into the recession and fell to 6 per cent below long-term averages towards the end.

It is also worth noting that international banks left the Australian market in the 1990s. So although there is some merit to the majors' growing market share and increasing margins, we do not believe this is sufficient to offset slowing asset growth, increased bad and doubtful debt, and the political pressure to pass through lower rates to customers.

In summary, all banks are trading in sideways consolidations at the moment. All have upside potential of 10 to 20 per cent from current prices and this could occur over the coming weeks through to late June or July.

However, if they break on the downside, the risk would be of the same order and this would weaken the market, and may signal that the down move into the yearly low is commencing early.

Lows for banks are due between July and September 2009.

Alan Hull, Leading author and educator

Sector: Resources

The big mistake investors make is thinking the 'darlings' in the last upturn will lead the market again this time around. The investment clock suggests a uniform movement between asset prices but in my experience this is rarely the case.

Beware going back to sectors where you previously made money in the last boom. Think back to the tech bubble: investors who were seriously wiped out were those who chased tech shares after the bubble burst, believing there were great bargains to be found.

The same could happen with resources. I believe resource shares generally could stay down for a few years, just as they did after the Asian crisis correction in the late 1990s. The global economy is just too weak and commodities demand could remain subdued for some time.

As such, I expect the resources sector to rally later in the cycle - it would be well behind other sectors on the investment clock. When money does return to the market in large amounts, I expect it to be directed to large, boring defensive shares.

Longer term, I like companies that are leveraged to powerful trends, such as the ageing of the population. The healthcare sector still looks very interesting in this regard.

Andrew Doherty - Head of equities, Morningstar

Sector: Retail

We still favour large defensive retailers such as Woolworths, Wesfarmers and Metcash because they have heavy exposure to non-discretionary spending. People are still going to Woolworths and Coles every week to buy food and this sector is not overly competitive. Some liquor shares, again a more defensive sector, also appeal.

When it comes to discretionary retailers, we favour large companies such as David Jones and Harvey Norman, which look more interesting after heavy price falls in the past year. David Jones, for example, is performing well in difficult market conditions. Again, our advice is to stick to the larger, high-quality companies with good yields and strong balance sheets.

Smaller retailers that rely on discretionary consumer spending pose much more risk. Rising unemployment is a big threat to their earnings. They would be well behind larger retailers, such as supermarket companies, on the investment clock. Their time will eventually come, but I expect small and mid-cap retailers to rally much later in the economic cycle.

Greg Hoffman - Head of research, Intelligent Investor

Sector: Deep cyclicals (e.g. building material stocks)

At some point every investor learns an important lesson: "The business is not the stock". The extension of that is "The economy is not the market". And while the investment clock model may hold some appeal for those with a passing interest in economics, it is of little use to investors.  First, it is too simplistic. But, more importantly, the sharemarket tends to anticipate the economic future rather than react to the present.

That makes investing in cyclical and economically sensitive sectors such as building materials and discretionary retail, particularly treacherous. At Intelligent Investor, we prefer businesses in these 'whippy' industries to be conservatively financed.

Each cyclical business must be analysed individually. We have recently recommended selected retail companies to our members, although we have only one building materials group on our buy list at the moment (in this case we have uncovered hidden assets that attract us more than the group's building operations).

James Kirby - Editor, Eureka Report

Sector: Healthcare

If it is the case that we are somewhere in the 'depths of depression' on the investment clock - that is between falling interest rates and rising share prices,  then before we get a sustainable lift in commodity prices, an area that may continue to be rewarding is healthcare.

Investors look to the healthcare sector for its defensive qualities. And there is evidence that revenues and profits in the sector are more dependable than, say, agriculture, aviation or any other industry exposed to global market volatility.  

The key variable in most health share forecasts is not, funnily enough, the health of the nation. Rather it is the disposition of politicians and public servants who control healthcare spending.

On the ASX, our own listed health care sector received an unlikely boost from the Federal Budget, when the government announced $1.5 billion to be spent on public health, but relatively little on public hospital beds.

That's tough for those in public wards but good news for investors in small-to-mid cap private healthcare companies such as Ramsay Health Care and Healthscope.

David Rees - Head of research, Jones Lang LaSalle

Sector: Property

Commercial property is probably at 4 on the clock. Commercial property values have been falling for the past 12 months and that may continue for another 12 months. Residential property is probably at six. We expect more price weakness at the top end of the market, but property values at the lower end in the mortgage belt should be reasonably solid with first-home buyers active.

We should see more investors come back into the residential market in the next 12 months. Changes to superannuation relating to the amount people can invest at the lower tax rate, could see negative gearing in property return to favour. In addition, the residential construction outlook remains weak for the next 12 months - so both the supply and demand outlook for residential property is relatively favourable. This could also support residential property prices.

About the author

Tony Featherstone is the former managing editor of BRW and Shares magazines, and consulting editor for ASX Investor Update. He is also the co-founder of www.kangaruni.com, a portal for international students in Australia.

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