Wednesday, March 21, 2012

The Simple Explanation is Not Always Correct

Today I read an article in an Australian traders blog http://roguetraderette.com/2012/03/20/why-the-economy-does-not-equal-the-stockmarket/ titled 'Why I want to be American' and how the underperformance in the Australian stockmarket is namely, the lack of hope, or in economists terms 'future expectations'.  She equates that our 'solid economy' doesn't equal the 'stockmarket' because of the hope of future growth is diminished compared to the languishing American economy and the new hope in their recovery.

I have to give it to her, her blog looks much prettier than mine, and she does blog more frequently, but on this point she is so incomplete in her analysis and so I'd like to add what's really factoring into the recent ASX underperformance.

- Equities are risk assets that are priced using discounted measurements -
High relative interest rates are laying down a twofold hurt to our stockmarket - first when every other global stock euro and US alike are being discounted at 1% vs 4.5% in our economy - with the US having guaranteed low rates until 2014 combined with the massive liquidity boost from the US Fed and ECB into the euro - then all of a sudden you see the difference in valuation - you have larger global firms, with more leverage being valued at low rates - this will lead to higher prices globally.

The second hurt is the high AUD which is making global flows wary of their translation risk - you're global fund manager holding AUD and there's a good chance we're at the top range of our historical valuation, buying ASX equities here unhedged for the foreign flows will be a massive lag on their performance if AUD suffers any malaise.

- The two key sectors are underperforming for different reasons
First Materials - the BHP's, RIO's, WPLs are really underperforming to the lack of China bubble and excitement, and thus have underperformed in the 1st qtr.
Second, Banks - the CBA, NAB, ANZ, WBC have not been sold off heavily during the 4th quarter relative to the global banks like BAC, GS - and thus have less price action to recover from in this quarter.

Some hidden reasons
Australian stocks are going through period of dividends and this is taking a lot of returns from the 'headline' and giving a hidden return to those who are holding through this period.

The obvious conclusion that the ASX performance is under-par is something all Australians are unanimous with, however there are other places in the market that we can trade - you can utilise a global broker that has competitive prices to trade US equities for $1 per trade - www.interactivebrokers.com; to trade ETFs to buy large sectors like tech (QQQ) or utilise the CFD providers in Australia to capture the movements in the obvious macro trends that are occuring such as bullish oil prices.  Whilst trading is not an easy game, the key to investor psychology is to migrate your funds towards trends and sectors that are working, instead of having a cry about what is not working and continually banging your bucket of capital against the well that is dry.