What to do in This Market

By Jason Fittler

A lot of investors are throwing their hands up in the air at present. Yes our market is under strain due to external forces mainly the US and its Sub Prime issue. But there are a number of things you should be doing to reduce losses and get your portfolio set for a recovery.

1. Use this as a period of consolidation. Portfolios need reviewing and adjusting.

2. Take losses, sell poor quality stocks, buy good quality ones. Remember you are rotating into stocks that are down from their highs.

3. Small cap exposure is on the whole still too high. The small end of the market is defying gravity if put in an historical context. A 50% exposure is too high, 30% exposure is probably too high for most investors you should look to reduce this exposure. No one small cap weighting should be greater than your biggest large cap one.

4. Banks - an obvious recipient of rotated funds given their attractive yield. No arguments as a long term investment but the question is being asked, are they really cheap? Yes, on most measures. No, if put into historical context of the 1992 financial crisis which suggests a PE sector average of 9 times, it is currently over 10 times. That doesn't mean don't buy the banks, it means that we could see some more weakness before they report late April/May.

I can't provide a stock to BUY list at the moment given the crucial stage of reporting season but will look at this closer at the end of February.

Stocks that have disappointed (not just been misunderstood) will take longer to recover, media, retail, and service companies (probably with the exception of mining services) are usually weakest in softer economic environments, high PEs in the small caps are vulnerable to re-rating, stocks with high payout ratios may mean the dividend is unsustainable, and obviously the explorers/unproven stories.

How does this affect you? Feel free to give us a call. Phone 07) 4771 4577