Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 240

Volatility and reflecting on the inflection

Initial selling during a heavy share market fall has nothing to do with valuations, and that is why it is always difficult to judge the extent of any short-term correction. With a bit of space from the immediate ructions of last week, what did it tell us about the long-term position of debt and equity markets?

Finally, a reaction to rising rates

Having watched this sort of thing far more than I’d like, my summary is this: it was an interesting but not unexpected week with a technical adjustment in markets. It was investors finally reacting to the fact that interest rates are adjusting to the reality of stronger economic growth and a US central bank that has begun the process of removing excess liquidity from the system.

Eighteen months ago, I thought that we had turned a corner not yet recognised by the broader market. Interest rates had inflected. Few people thought the same, particularly given the lack of wages growth in the US and the fact that interest rates were still negative in parts of Europe.

Scaling the wall of Fed money

The Federal Reserve monetary base since 1950

In September 2016, I expressed a view in our quarterly report that investors should note how abnormally low rates are (and remain so now) and not to allow the gyrations of the market to hide the fact that the tide may be changing. We thought the inflection point had occurred in July 2016 and there would be a different set of long-term opportunities in future.

Our expectation was that economic growth and earnings would be better than expected and the short-term price action risk would now more likely come from inflation scares and subsequent upward moves in interest rates.

Between then and now, we have invested based on our belief that markets were underestimating how tight labour markets were, with the most common complaint from CEOs in the US being the inability to find workers. Coupled with the passage of Trump’s tax cuts late last year, which in theory will create significant pent up demand, interest rate markets have noticed that the inflection point had already been reached.

Flow into bonds at the expense of equities

However, investors (particularly passive ones) have been still piling into bonds at the expense of equities.

Until recently, the lack of wage growth was still a popular theme. This was looking in the rear-view mirror. Then we saw the strongest year-on-year increase in US wages for some time and market sentiment turned on its head and interest rates appeared to trigger a technical reaction in equity markets.

I suspect it is simply further confirmation that excess liquidity is starting to leave the system, the most high-profile examples being through VIX funds and even Bitcoin. Investment opportunities will now be in those companies that can grow their earnings, as opposed to those that historically benefited from a re-rating on the back of lower interest rates.

Investment opportunities, but with some cash caution

Many forecast valuation multiples seem reasonable. As examples, home builders are trading at less than 10x forecast earnings, banks and alternative asset managers at 10-12x and Pfizer is 11x. Over 50% of our global portfolio is on an average price to earnings (P/E) ratio of approximately 11. Other large sectors and stocks, as monopolistic and high growth businesses like the financial exchanges, Mastercard, Visa and Google range in P/E ratios from 18-24x, which seem reasonable for the nature of their businesses. We believe these types of businesses will give a satisfactory return in a general market environment of lower returns and choppier price action.

With last week’s pullback in the market, we marginally reduced some of our futures hedges, closed out short REIT positions and will, in all likelihood, marginally increase some of our existing positions. This will be done within an overall framework that interest rates have inflected, markets have done well, and an invested position of approximately 85-90% is prudent.


Paul Moore is Chief Investment Officer at PM Capital. This article is general information and does not consider the circumstances of any investor.


Floating rate bonds rise in popularity

Five reasons Australian rates unlikely to follow US

Buffett on inflation and equity investing


Most viewed in recent weeks

Buffett's meeting takeaway: extreme caution

Warren Buffett's annual meeting of Berkshire Hathaway showed he has not been 'investing while others are fearful' during the crisis. lt's a reminder to take caution and preserve cash.

Welcome to Firstlinks Edition 356

Few investors are as influential as Warren Buffett, although for the moment, the market is ignoring his caution. The annual meeting of Berkshire Hathaway revealed Buffett did not use the heavy market falls in February to buy shares. Rather than 'buy when others are fearful', he was a net seller of US$6 billion for the quarter, disposing of all airline shares. Berkshire is sitting on US$137 billion in cash, suggesting he expects better buying opportunities to come.

  • 7 May 2020

The vibe of future returns: tell ‘em they’re dreamin’

It's the vibe, but not much else. Super balance calculations default to earnings rates of 7.5%, but that's in the past. Global experts suggest financial plans are now dreaming at this level.

Baseline outlook for economic recovery is too optimistic

We cannot throw our hands up in the air and say 'this time around, it's simply too hard'. Having no macro view is unhelpful, but many of the baseline scenarios are overly optimistic, says the former CEO of Westpac and now Chairman of Chi-X Australia.

Retiree spending patterns differ from most expectations

A study of actual spending habits shows retirees have a faster-than-expected drop-off in spending in later years, casting doubts on financial plans that assume increasing expenditure over time.

Welcome to Firstlinks Edition 357

There is a remarkable concentration similarity between the Australian and US stock markets that has delivered poor results for Australians and great results for Americans (and global investors). As the share prices of five Australian banks have tanked, the prices of five US technology companies have surged. Each group now represents 20% of their respective indexes, but the journey has been a disaster for many Australians.

  • 13 May 2020

Latest Updates


Baseline outlook for economic recovery is too optimistic

We cannot throw our hands up in the air and say 'this time around, it's simply too hard'. Having no macro view is unhelpful, but many of the baseline scenarios are overly optimistic, says the former CEO of Westpac and now Chairman of Chi-X Australia.


Will our government embrace these three reforms?

COVID-19 is an opportunity for a crucial policy reset, but what does that really mean? Business is hoping for three big reforms, but there are massive barriers to be overcome.


8 reasons business has little to learn from 'The Last Dance'

Everyone seems to be watching The Last Dance, a fascinating sports documentary about the pursuit of excellence by one of the greatest athletes of all time. Let's not stretch the business analogy too far.


Do long-term investors need to care about the ‘next big thing’?

When we look back five years from now, which companies will we regret not having bought at today’s prices? The next opportunities come from focusing on the long term, not the next few months.


Not all non-residential real estate performs the same

Retail assets, particularly those focused on discretionary shopping, will continue to underperform and industrial and logistics assets will be the winners for the foreseeable future.


The uncertainties of using debt in a time of crisis

The ability of countries to support their economies today turns on fiscal practices set well before this crisis. Increasing levels of debt escalate overall risk, and tie our hands in the future.


Do you qualify for this help in the crisis?

It will surprise many that benefits worth over $8,700 could be available for a couple with a super balance over $4 million. Check if you are eligible for the Commonwealth Seniors Health Card.


What SMSF trustees need to know about benefit payments now

The government has announced initiatives to help people use their superannuation in response to the crisis, but for early access and drawdown changes, there are important rules to follow.



© 2020 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.