Last week we mentioned that mainstream investors can’t make an investment decision without some big macro-economic story guiding their hand.
At the time the big story was the so-called Sequester. That is, the automatic budget cuts and tax increases if the US President and Congress don’t cut a deal.
The deadline for the Sequester is Thursday, 1 March.
Yet even before that non-story gets a chance to wreak havoc on the markets, another has emerged. This one is the Berlusconi.
And judging by the market’s reaction to the Italian elections overnight, this is set to cause the stock markets more damage…or is it?
This morning, as we write, the S&P/ASX 200 is down 77 points. That’s 1.5%…a hefty drop by anyone’s standards.
But like it or not, the index is still more than 500 points higher than last November’s low point. And as we always tell you, the stock market never rises in a straight line. You’ll always get bumps and jolts along the way:
As we see it, the blow-off from the Sequester and the Berlusconi (named for ex-PM and prospective new PM, billionaire Silvio Berlusconi) will do little more than knock some of the wind out of the stock market’s sails.
So forget about Berlusconi. And forget about the Sequester.
Of course, we could be wrong…but we don’t think so.
We’re backing this market pretty hard. We don’t believe the low interest rate story has fully played out in the Australian stock market.
Yes, stocks have taken off since last June, but the Aussie market is still 29% below the 2007 peak.
And if you look at the measures taken in the US and Europe to boost their markets (zero per cent interest rates, money printing, nationalisation, subsidies and tariffs) the Aussie pollies and bankers still have a lot of room to move.
Not that we like those policies. By now you should know that we hate any form of government meddling. But when it comes to making money and building a treasure chest for retirement, well, we’ll admit it, we’re pragmatic as well as contrarian.
We understand that we can jump up and down as much as we like, but only a fool would stand in the way of a surging market.
The question many investors ask is: where is the value after a 20% gain in just nine months?
As you know, our speciality is small-caps. It blows us away that there’s so much value in the more than a thousand Aussie stocks that fall into the small-cap category.
But it’s not just among the small-caps. Look at the following chart. We’ve compared the one-year performance of the Consumer Staples index (XSJ) with Energy, Industrials, Materials, and Metals and Mining indices:
As you can see, over the past year the Consumer Staples index (blue line) has gained 34%. The next best performer in this chart is the Industrials index with an 8.55% gain.
This chart shows perfectly what has happened over the past year. Investors have piled into what they consider some of the safest stocks on the ASX – consumer staples stocks.
Not only do investors consider these stocks safe, but they pay healthy dividends too. That has made them a magnet for investors in the current low interest rate market.
This is what we’re talking about when we say there’s still a bunch of value in the market. Not just in small-cap stocks, but in mid-cap and blue-chip stocks too.
It’s partly for this reason that we’re switching our focus back to resource stocks in the next issue of Australian Small-Cap Investigator.
We’re betting that resources stocks (energy and metals) will be the next to benefit from record low interest rates. Our old pal Dr Alex Cowie says that the Chinese government is set to splurge on stimulus and infrastructure spending over the next two years.
If he’s right, it will be a boon for Aussie resources stocks. Add this to low interest rates and it could be take-off for the sector.
Many investors think commodity prices have to be high for resources companies to do well. That’s wrong. The biggest factor in resources stock prices aren’t commodity prices, it’s the access to capital.
If China is set to splurge (as Doc Cowie says) and if interest rates stay low, investors are more likely to back resources stocks. But that’s not all, low interest rates will make companies more inclined to seek financing.
As we say, we could be wrong. But from where we’re sitting, the combination of undervalued stocks, China’s infrastructure spending, and low interest rates should make the energy and metals markets the hottest sectors to invest in this year.
Cheers,
Kris
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From the Port Phillip Publishing Library
Special Report: The Gold Mirror of Kaieteur Falls
Daily Reckoning: Stock Prices Are Not What You Think They Are
Money Morning: China Bull Versus China Bear – There Can Only Be One Winner
Pursuit of Happiness: ‘Let Them Eat Horse’