Have we hit bottom yet?
07 May 2009
It’s a strange thing. Everyone agrees that it is difficult to market time and there’s no point in trying to pick the bottom of the market. Yet every second conversation in the markets today revolves around that one question: “Have we hit the bottom yet?”
Of course, it is difficult to market time. But a useful exercise is to identify those signs that might suggest the worst is over. The emphasis here is definitely on might.
The AUD: Our currency is still linked to the commodity cycle, so if the dollar starts to rise it suggests higher commodity prices in response to global economic activity picking up. At the same time, stronger demand for the AUD – one of the most traded currencies globally – would indicate an increase in risk appetite in the market.
Seasonal share market activity: A recovering equity market that goes hand in glove with a close appreciation of the seasonal cycles. In the equity markets, historically the months of March and September tend to be volatile, weak periods caused by seasonal factors while December, January tend to be strong – so it was a discouraging sign for the equity markets when we had such a weak start to the year.
The month of March remained volatile, reaching new lows in early March. However, lately there has been some market cheer, especially in the past few weeks when the market has rallied to close up for March. While the volatility will remain, what we need to look for is for the market to hold its lows (don’t go any lower) through September and early October and wait for the seasonal bounce in December, January. If this occurs, it’s another sign that investors (retail and wholesale) are regaining confidence in equities.
Property trusts: these investment vehicles, by the very nature of their business, receive rent from a wide range of industries and groups and require refinancing of loans at fairly regular intervals. The credit squeeze has had a deleterious effect on the sector, with figures quoted of about $6 billion being wiped out on the value of mum and dad investments after the meltdown of Australia’s property trust sector.
The losses stemming from falling commercial property values could continue this year, with many funds yet to fully reflect revaluations of their properties.
With many major unlisted trusts freezing redemptions, investors have lost confidence in the sector and its business models. High gearing and lack of transparency of valuations are the main reasons for concern.
If, however, we start to see this sector performance improving, this will illustrate improvement in valuation expectations and sentiment towards refinancing. It will also signal improvements in the practical functioning of the banking system and, by extension, the whole market.
Risk taking by fund managers and hedge funds: What we want to see is general credit growth in the economy as firms and individuals show more willingness to take risk and gear up for the opportunities ahead.
That’s easier said than done, because there remains a lot of doubt. Beware of the statement that “there’s a lot of cash on the sidelines”. Remember, the markets have been supported by borrowed money, not money at the bank.
Also, the hedge funds were geared up to six times, on average, as an industry, so when more than $200 billion was redeemed, it was like taking $1.2 trillion out of the markets.
We need to see hedge funds willing and able to gear themselves up again – maybe not to their former heights, but certainly higher than current levels.
US housing: That’s right, US housing, where this mess began. The sub-prime crisis, as personified by the countless number of Americans who could not afford to repay housing loans but were still fuelling a building boom, which was the trigger for the GFC.
But equally, signs that this huge market has stabilised or is on the upswing will go a long way towards improving sentiment.
The good news is US housing starts rose for the first time in eight months in February. The bad news is hardly any one believes it’s the bottom. It’s a temporary rebound, not a recovery, one US analyst was recently quoted as saying.
There was still plenty of stock out there and more and more people were worried about their employment security, so there was no good reason for a rise, the thinking goes.
Still, if despite these gloomy prognostications, housing starts and sales start to stabilize or rise in the coming months, it’s another sign we’ve been looking for to say we are off the canvas and back in the fight.
Key indicators: Markets will recover before key indicators tell us otherwise.
As a case in point, the market will recover before we see confirmed figures from the Bureau of Statistics, RBA, industry groups, analysts, etc, pointing to a rebounding economy. By that time, however, a good few businesses will surely have gone broke.
And, most unfortunately, unemployment will continue to get worse even though the markets are recovering. This lagging effect will have unwelcome consequences on the real economy, keeping a lid on the retail and housing sectors while the financial services sector has finally got its house back in order.
It is good to remember that market timing is difficult and as everyone’s favorite economist of the hour, John Maynard Keynes, said: “The market can remain irrational longer than you can remain solvent.”
