Aussie Stocks Hit the Bargain Bin
Today marks the beginning of the most important week for the ASX this year.
Last week we left the market near the February low of 5,786 points.
The SPI 200, the ASX futures contract, is now at 5,743 points.
That suggests the market will fall to a five-month low in today’s trade.
Things look troubled around the world.
But here’s the thing…
Aussie stocks are a screaming bargain.
A two-year low and 16-month high
Today’s Australian crunched some numbers to back this up. The estimated forward price-to-earnings ratio for the next 12 months is about 15.1. That’s a two-year low.
The estimated dividend yield has now risen to a 16-month high of 4.6.
Consider this in the context that a five-year Aussie government bond yields 2.3% and inflation is at 1.9%.
Stocks look a much better buy.
Not only that, but we have dividend payments gushing out into investor pockets right now.
$10.37 billion in dividends is due to be paid out this week alone. A total of $22.3 billion is due over March and April.
I cited some numbers the other week that suggests a lot of this money will head straight back into the market.
There are no guarantees, of course. But the dip is here for the buying if you ask me.
It won’t feel easy. But it never does — that’s what makes markets so difficult to navigate.
How to cope with nerves and stress
You do need to be convinced in the ‘big picture’ scenario to withstand these periods of volatility and concern.
And the big picture is that this is a dip in what is otherwise a bull market.
A look at past markets can help with this.
I watched a video last week on the rise of US internet giant Oracle in the 1990s.
In 1995 you could have bought one share in Oracle for under US$4.
By 2000 you could have sold that same share for US$45 — a gain of 1,000%.
Oracle had big retracements all the way up to that epic peak. In 1999, for example, it almost got cut in half.
It took nerve and vision to hold on. During that time there was nervousness and worry about the technology sector and the world economy as a result of the Russian default and Asian financial crisis.
This rarely changes. There are always concerns around the market.
Hence the expression: Market climbs a ‘wall of worry’.
A lot of Australian fund managers have made it known that they’re sitting on large levels of cash.
They’re going to step in and buy at some point. They want to put the cash they have to work.
It would be exceedingly unlikely for the ASX to go into a major bear market now.
Bull markets historically die on euphoria, not pessimism.
How to take advantage of this…
Pick up some shares that you’d be happy to own long term.
Now, I can’t tell you when this down-move will finish.
But I’m confident that in 12 months’ time this fuss about Trump’s tariffs will be forgotten and investors will be fretting about something else.
Here’s an example…
In February 2016 oil hit a low of US$26. One colleague of mine even cited a Russian economist — with a good track record of forecasting the price — who said it might even go to US$10.
Investors fretted about deflation gripping the world.
Oil is up 150% since…and now the worry is inflation.
This is one way in which headlines can lead you astray.
Even if you’re not as positive on global growth as I am, it doesn’t mean you should stop looking at stocks entirely.
You could consider looking into one sector in particular right now…
I’m talking about commodities.
In the 1970s, there was a massive boom in commodities.
Sugar, for example, went up 1,290% between 1969 and 1974. Corn went up 295%.
Oil rose fifteen-fold in the 1970s.
I’m pointing this out because the economic backdrop of that era was mostly a disaster.
Inflation in the West was nearly the worst it had been in history except for specific hyper-inflationary episodes.
And yet commodities flourished because investments in productive capacity languished in the preceding decades as demand boomed.
The same set-up is happening now.
Commodity prices, relative to stocks, are at a historic low. Investment has been way down for years.
Commodities can also move in an uncorrelated way to the stock market.
Gold and oil were up last week despite stocks trembling.
The opportunities in this sector will run for years…long after Trump’s trade moves are forgotten.
I’ll have some ideas on this in the near future. Stay tuned.
Editor, The Daily Reckoning Australia