The easiest way to make money is to not lose it. This August reporting season is shaping up to be a negative earnings year. At this point we are expecting the earnings per share will be down 3.5%, noting that the 2023 year was also down 2.9% as well. Two consecutive years of negative earnings. However, we expect that the 2025 year should be better on the back of the resources sector which is forecasting earnings rebound of 10%.
There is a lot of negative information around our economy at present, which is warranted based on the lack of government action in making the hard decisions. The core issues in our economy at present are:
- Inflation – started with COVID and supported by Government spending and tax reductions.
- High levels of debt – this is mainly home loans which are directly affected if there is an increase in interest rates.
- Immigration – this effects housing prices and increases government spending.
So, what does all this mean for investors? Opportunity!
We continue to buy under-priced blue-chip companies in the materials sector and are taking profits in the banks sector. We continue to maintain an overweight position in fixed interest and corporate bonds.
Last week we saw our market fall 6% in one day. The media played it as if it was a market collapse. It was due to the Magnificent 7 shares; these are all shares in the tech sector boosted up due to AI expectations. The pull back was just investors take some profits.
This pull back was a good example of a diversified portfolio, as the fixed interest investment’s gains covered about 70% of the losses from the shares. We still expect that the market will move higher over the coming years. Our target is for the ASX 200 to reach 8800 points. Currently our market is sitting at 7800 points.
The next six to twelve months will be interesting. We have an economy with high inflation and homeowners with high debt levels. We have already seen the interest rate stay on hold twice. There seems to be no appetite for Government to reduce inflation. At the same time the Government continues to flood money into the economy. I just got an electricity rebate!
I expect that the Government will continue to spend up until the next election, which would cause a hard landing for the economy.
Given the expectations for the market, we continue to focus on the fixed interest sector for capital security and income from interest rates of around 5%. Bonds are also a good hedge at this time as bonds will provide income and capital gains if interest rates start to drop.
We also like the blue-chip shares; we expect materials will be in demand over the coming years and will provide solid growth and a moderate income. We also like banks, however, we caution investors that we do not see much upside on the price of the big banks as they are overvalued at present, especially CBA. We see the banks as a source of income, we expect that if the market drops the banks will too but will also be the first to recover.
At present the small cap sector seems to be undervalued as investors have been pushing in the blue stock sector. We expect that there is an opportunity in the small cap sector for those investors comfortable with the risk. You could reduce the risk of the sector by investing through Exchange Trading Fund (ETF). There are several ETFs in the sector. The one we like at present is Vanguard MSCI Australian Small Companies Index ETF – VSO.
My last comment is regarding volatility; early August volatility jumped 100% to the highest level this year from an average level of around 12 up to 40 which indicates that risk in the market is increasing. Currently it’s sitting at 20.
If you have any questions, please contact our office.
AFSL 403509
51 Thuringowa Drive
Kirwan QLD 4817
Phone: (07) 4771 4577
Email: [email protected]
Jason Fittler: [email protected]Jane Fittler: [email protected]
