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Time for a new Australian stock market investment strategy?

September 5th, 2011 · Greg Atkinson · 12 Comments

Often finance writers comment that the investment world has changed since the Global Financial Crisis sent stock markets around the world tumbling in 2008 and 2009.  Maybe that is true or maybe it’s just that investors stopped paying attention to the risks and focused too much on the possible profits? In any case, it’s time to think about what might happen in the next 5 years or so and contemplate making some changes to my Australian stock market investment strategy.

At this point please let me stress that nothing on this site or my ramblings are intended to act as any form of investment advice. I am not drinking cocktails on a private yacht in some sunny tropical location while millions of dollars pour into my bank account, so please don’t think for a second that I am suggesting a share market investment strategy that investors should follow.

Let’s quickly review what has happened over the last decade.  Back in the years proceeding the financial crisis many major developed nations borrowed vast sums of money and this made everyone feel warm and fuzzy because the GDP numbers looked good.

Politicians and most economists like getting excited about any type of economic growth but don’t seem to worry if it can be sustained over the long term or not. So for years it was spend, spend, spend and wondrous new ways were found to make money out of thin air via “financial engineering”.

I have lamented about the obsession with GDP before and in late 2009 I wrote:

“The focus on GDP leads us into an economic trap because once most people are convinced that GDP growth is good, that is what governments will strive to give us. Quality of life issues, diversifying the economy and a whole host of other factors we should be taking into account in terms of managing the economy don’t get much attention.”

and;

“My view is that Australia has wasted a golden opportunity to position our economy for the decades ahead. I believe the majority of the stimulus money that has been pumped into the economy has not been well spent, I see few clearly defined outcomes and reckon the Australian economy has a cold which could easily become something a lot more nasty.”

Source: GDP growth does not equal a quality Australian economy.

Anyway enough about GDP, I will now get back on topic.

When the GFC hit the first villain was debt and the way it was diced and sliced not to look like debt. The politicians blamed the bankers and the economics held up Keynesian economics as the way to save the global economy.

So the G-20 leaders came up with a cunning plan to spend, spend, spend (with many nations having to go further into debt to spend) and this apparently was going to fix things. Well it didn’t and we are now past blaming the bankers and the politicians are now in the firing line.

One of the few shining economic lights is China and in this case we are supposed to trust the GDP numbers and believe that a command economy is doing a good job of allocating resources.  That seems a little too good to be true to me.

In Australia the high dollar is smothering the manufacturing and tourism sectors, the number of foreign students coming to Australia appears to be on the way down so our GDP numbers are being propped up largely by housing,  government spending and of course commodities. (hard and soft)

Of course we are doing our best to smother these sectors as well via the mining tax and bans on the export of live cattle & sheep for example.

So putting all the above together I see the following risks:

  • The Chinese economy will slow considerably and prices for iron ore and coal will come off their current record highs.
  • The Australian economy will enter a period of recession.
  • The U.S. economy will struggle for years and is already in it’s version of a “Lost Decade”.
  • The debt mess in the Eurozone will take years to sort out at best.
  • Global economic growth will be subdued for the next 2 years at least.

Therefore I think it’s prudent to review my long term Australian stock market investment strategy taking the following into account:

  1. The commodities boom has been a hoot but it’s time to take some money off the table. (I actually have been doing this for much of 2011)
  2. The Australian domestic economy is hardly going to be the place to have a lot of exposure over the next year or so. If there good companies that pay a healthy dividend and their stocks are available at a bargain price then I might be interested, otherwise I will give those sorts of stocks a wide berth.
  3. The Australian manufacturing and tourism sectors are in big trouble and it will take years to turn them around if it fact they can be.  So I don’t feel inclined to buy stocks in those areas.
  4. Australian companies that have good revenue coming in from Asia or emerging nations or the potential to grow revenue in these markets are worth having a good look at.

What all this means for me is that cash is indeed king and that I am not inclined to move money out of cash at the moment and probably not for a few years unless these is some dramatic turn around in the global economy.

If there is a change of government in Australia then I would expect stocks to rally 10% or more but during that rally would be a good time to take any profits, rather than convince me to leap back into the stock market in a big way.

Overall I feel I have become less of a long term investor and am now more focused on the short-medium term. Whether or not that is a good change to make to my investment strategy only time will tell.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


12 responses so far ↓

  • 1 Biker // Sep 5, 2011 at 2:04 pm

    Greg: “I am not drinking cocktails on a private yacht in some sunny tropical location…”

    Hell,you’re not _old enough_ to have earned that right, yet, Greg! 😉

    You may, however, be interested to hear that Nasar totally supports some of your economic views: p. 442. 😀

  • 2 si // Sep 5, 2011 at 2:23 pm

    Your thoughts and analysis are appreciated Greg.

    I moved the bulk of my liquid assets (super) into cash in 2010, so far that has been a good move (just wish I’d followed my gut back in 2008 as well:) and am considering when and where to get part of back into the market. Non-discretionary retail stocks like WOW and WES might be worth a look if panic selling strikes again.

  • 3 Lachlan // Sep 5, 2011 at 2:32 pm

    I guess since every dollar is a debt with interest owing that recession is always and everywhere inevitable from time to time however some places have peaked (private sector over-leveraged) in their ability to inflate debts away without overdoing things (hyper-inflating) and some places may have a good deal yet to run. Won’t China find millions of poor people to loan money to…..is the gist of it. And India and other Asian countries?

  • 4 Greg Atkinson // Sep 5, 2011 at 2:37 pm

    si I wish I had bailed out of a lot of stocks in 2007/2008 instead of shifting across somewhat to stocks with good yields…some of which are no longer with us. We live and learn as they say.

    WOW and WES are both worth looking at I agree. I am a bit worried about WES because of their exposure to coal but they do seem to be turning Coles around.

    Biker I would settle for a cold pier on a dinghy at the moment..I am not a greedy fellow 🙂

  • 5 si // Sep 5, 2011 at 4:10 pm

    For sure Greg, the main thing I’ve learnt in the last few years is that I have to do my own research and thinking, and yes, don’t be too greedy 🙂

    To be honest I find it difficult to invest in the share market outside of super when the minimum I’ll pay is 25% tax on any profits, and any cash I invest has already had at least that much in tax taken from it. You either have to be in for the long run (super:), get lucky or have excellent timing in a volatile market, or take risks with leverage.

    It seems like a far safer bet to reduce debt as quickly as possible (for me this is “only” 200K mortgage), even though I suspect interest rates may be a percent or two lower over the next few years.

    For what it’s worth, I’ve just signed up with http://supertrader.news.com.au for a bit of fun.

  • 6 Stillgotshoeson // Sep 5, 2011 at 5:34 pm

    Some of my trades from around then…..

    CBA 24-Nov-2008 Buy 1000 30.09
    AGO 17-May-2010 Buy 10000 2.19
    GMG 23-Mar-2009 Buy 280000 0.17
    JBH 24-Nov-2008 Buy 1500 8.59
    WBC 24-Nov-2008 Buy 1000 16.08

    Doing research and not being greedy have paid of many times for me trading. Did my taxes 2 weeks ago, accountant says I should really decide if I want to be a trader or an investor now. Going it as a trader means I won’t pay CGT, it will be straight profit/loss. Getting to the point that my job will be my hobby.

    WES vs WOW I have gone WES The coal issue is not that great I feel, still a lot of countries using/wanting/needing coal. WOW’s move into hardware with Masters I feel won’t be that succesful.. not in Victoria/Melbourne anyway Bunnings have a huge headstart and a premium landbank to expand further on.

    Took the profits on BOW today. Also sold PRU for a better than a dollar a share profit Through my super 15% CGT on BOW only 10% on PRU as held over a year.

    si (smart investor?) I agree that super is the best way to invest in shares due to the favourable CGT aspects and the salary sacrifice option of wages into it straight up, That being saiD I still have a portfolio outside of Super. Super being locked up and the frequent government changes with it give incentive to also have an alternate source. I also have specific plans/ideas that I wish to do and building up a source of capital that is not locked up has allowed, and hopefully will continue to allow, me to do these things.

    I am not to keen on gearing, many of my share picks have done well and I could have magnified gains through gearing against them.. I am not greedy though, it has been a steady as she goes plan for me.. set a buy price, set a sell price and have stop losses in place. I have bought shares again after selling them when they have dipped back..

  • 7 Greg Atkinson // Sep 6, 2011 at 10:55 am

    Back in 2007 and early in 2008 the banks were pushing margin loans as a way for people to build up their stocks portfolio, now you hardly see them mention those loans at all. I can’t imagine there would be a lot of investors keen to take on debt at current interest rates and pump money into stocks.

    The situation in Europe seems to be going from bad to worse and the U.S. economy appears stuck in a rut.

    My current strategy is to sit on my hands and be thankful when the dividends roll in.

  • 8 Biker // Sep 6, 2011 at 11:08 am

    Certainly is interesting _watching_ from the sidelines, Greg. Always find it fascinating when investors tell us their ‘bets’ rather than their ‘gets’.

    Greed? I’ve seen some major punts listed online over the years.
    In chicken-counting terms, the best of these seem to involve an individual proclaiming what he/she expects to _make_ from a punt… many hundreds of thousands, in some cases… .

    I suspect all most of us here want is a debt-free base… and enough to live on independently and _comfortably_ for life.
    I doubt that’s greed. 🙂

  • 9 Brian L // Sep 8, 2011 at 2:46 am

    G’day Greg

    As you know I’m an observer of the BDI as are you.
    What do you make of the current 2011 high’s that are occuring?

  • 10 Greg Atkinson // Sep 8, 2011 at 8:23 am

    Brian I am thinking that maybe the issue regarding the Chinese trying to renegotiate shipping contracts might have been resolved plus perhaps the oversupply of shipping capacity might be working itself out slowly. Maybe the BDI will get more attention if it breaks though 2000 because at the moment most finance & business journalists don’t seem to know it even exists 🙂

  • 11 Brian L // Sep 16, 2011 at 3:42 am

    Now through 1900. Is it time yet?

  • 12 Greg Atkinson // Sep 16, 2011 at 1:36 pm

    The BDI has been having a good run Brian that’s for sure. Over the weekend I will look into the shipping news and see if I can find out what is driving it up.

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