Market Update – March 2017

The S&P has finally posted a -1% fall overnight, and looks a bit overstretched on the upside. I assume the slightly dovish stance by the US Fed is causing money to flow back in to the bond market which has suffered huge falls in recent months. I thought I would look at where the market stands just in case we have some further falls, at least in the short term.

From the chart of the S&P below, we can see that the market was overdue for a bit of a correction. The -1% move is hardly significant in the context of the strong post election rally. It’s anyone’s guess what happens from here, but further falls down to support (the purple lines) would not be a cause for concern. There should be plenty of buying support at several points on the way down.

While many commentators are saying the US markets are hugely overvalued, I tend towards Buffett’s view that much depends on the path of interest rates.

And we are not in a bubble territory or anything of the sort. Now, if interest rates were 7 or 8 percent then these prices would look exceptionally high. But you have to measure … everything against interest rates, basically, and interest rates act like gravity on valuation. So when interest rates were 15 percent in 1982 they’d pull down the value of any asset. But measured against interest rates, stocks actually are on the cheap side compared to historic valuations. But the risk always is, is that — that interest rates go up a lot, and that brings stocks down. But I would say this, if the ten-year stays at 230, and they would stay there for ten years, you would regret very much not having bought stocks now.

So Buffett, the world’s greatest living value investor, doesn’t think the current US market is overvalued. And the US market is at much higher valuations than the rest of the world. Europe and much of Asia, particularly South Korea, look cheap. This fantastic interactive chart from Star Capital shows that Australia is at the high end of valuations, but our dividend yield is extremely attractive by world standards. If you can hold your nose, Russia looks very cheap!

Fundamental Valuation Ratios in International Equity Markets as of 12/30/2016.
Country Weight CAPE PE PC PB PS DY RS 26W RS 52W Score
Russia 1.1% 5.9 9.1 5.1 1.0 0.9 3.7% 1.22 1.35 1
China 1.1% 12.8 7.2 4.5 0.9 0.6 4.2% 1.05 1.13 2
Italy 1.0% 12.7 31.5 5.7 1.2 0.6 3.3% 1.13 1.11 3
Austria 0.2% 14.3 21.7 7.3 1.1 0.7 2.5% 1.10 1.15 4
Norway 0.4% 12.8 32.4 7.4 1.6 1.2 4.0% 1.10 1.17 5
Hungary 0.0% 12.5 49.8 7.5 1.4 0.7 2.3% 1.12 1.19 6
Spain 1.2% 11.7 24.7 7.0 1.4 1.2 3.7% 1.08 1.11 7
Czech 0.0% 8.9 13.6 6.1 1.3 1.0 6.7% 1.03 1.05 8
Brazil 1.3% 9.8 42.1 7.4 1.6 1.2 3.0% 1.06 1.24 9
Portugal 0.1% 11.3 29.0 4.8 1.5 0.7 3.9% 1.05 1.06 10
Poland 0.2% 10.1 29.2 9.4 1.2 0.8 2.7% 1.07 1.08 11
France 3.8% 18.3 23.4 8.1 1.6 0.9 3.1% 1.09 1.12 12
Korea (South) 1.6% 13.0 12.5 5.4 1.0 0.7 1.7% 1.00 1.06 13
Taiwan 1.2% 18.7 15.5 8.6 1.8 1.0 3.9% 1.05 1.14 14
Singapore 0.9% 11.4 13.3 9.1 1.1 0.9 3.5% 1.00 1.04 15
Germany 3.4% 18.6 18.7 9.1 1.8 0.8 2.5% 1.07 1.11 16
Turkey 0.3% 9.4 10.0 6.4 1.3 0.9 2.7% 0.96 0.94 17
South Africa 0.6% 17.6 16.4 10.3 2.0 1.3 3.7% 1.04 1.13 18
Thailand 0.5% 18.6 16.3 8.4 2.0 1.3 3.0% 1.05 1.12 19
Hong Kong 3.6% 14.3 15.3 10.5 1.2 1.8 3.2% 1.01 1.08 20
Israel 0.2% 13.7 16.6 7.2 1.4 1.2 3.0% 0.99 0.99 22
Canada 3.2% 20.5 23.7 9.2 1.9 1.6 2.7% 1.06 1.14 23
Japan 9.3% 24.9 19.4 8.8 1.3 0.8 2.0% 1.04 1.09 24
Sweden 1.1% 20.6 15.8 10.2 2.1 1.6 3.4% 1.06 1.09 25
Australia 2.1% 16.8 26.2 11.5 2.0 1.7 4.2% 1.05 1.11 26
Finland 0.4% 18.1 18.9 16.4 2.0 1.4 4.1% 1.06 1.10 27
Netherlands 1.1% 19.8 25.4 10.4 1.8 1.1 2.9% 1.06 1.09 28
United Kingdom 5.4% 14.8 47.2 11.7 1.8 1.2 3.6% 1.06 1.07 29
New Zealand 0.1% 20.3 17.5 11.3 1.8 1.7 4.4% 0.98 1.05 30
United States 43.0% 26.4 21.8 12.4 2.9 1.9 2.0% 1.07 1.13 31
Malaysia 0.5% 15.5 17.9 10.9 1.6 2.1 3.2% 0.97 0.97 32
India 2.5% 17.6 23.0 14.3 2.6 1.7 1.5% 1.00 1.07 33
Ireland 0.1% 31.2 20.8 14.8 1.9 1.7 1.0% 1.06 1.01 34
Indonesia 0.6% 18.5 20.7 13.4 3.1 2.7 1.9% 1.01 1.07 35
Switzerland 2.7% 21.5 27.6 18.2 2.4 1.9 3.3% 1.04 1.06 36
Philippines 0.4% 19.9 18.3 9.7 2.2 1.7 1.9% 0.93 0.96 37
Belgium 0.7% 21.3 31.8 14.2 2.3 2.0 3.2% 0.99 1.01 38
Mexico 0.6% 21.5 21.1 10.6 2.4 1.4 2.0% 0.96 0.96 39
Denmark 0.6% 33.3 33.4 11.9 2.7 2.0 2.0% 1.00 0.99 40

The chart of the All Ordinaries below shows that the Australian market is still languishing below the May 2015 high, when we started the fund. I’m quite surprised we haven’t yet tested the high at 6000. Any temporary weakness from here could take us back down to 5650, which I would consider a good buying opportunity. Any falls below that level should definitely be bought.

The Small Ordinaries index is another story – and unfortunately it tells the story of our fund performance for the past 6 months. The chart below shows how badly the index has performed since 2011. However, there is a huge zone of support/resistance between 2250 and 2300. The symmetrical triangle I’ve drawn on the chart shows indecision since August last year. If support holds, I would expect an upwards breakout at some point. Any falls below 2250 would be unbelievable weakness at this stage in the cycle.

Keep in mind that the Small Ords comprises 200 of Australia’s top 300 companies (excludes the top 100). This shows just how weak our stock market has been for nearly a decade. A healthy market should have broad participation from our small and mid-size companies.Overall I remain fairly bullish on the stock market, especially since investors can no longer hide in the bond market if they want a decent return.

One thought on “Market Update – March 2017”

  1. Hey David

    Thanks again for your analysis and commentary on current market conditions. As always, what I find particularly helpful are you insights on what is happening in other sectors of the market and the effect that Index ETFs are having on the small caps and where we are in the market and interest rate cycle. Enjoying the insights you compile from other well known investors.
    Please keep blogging, I am learning a lot. The last couple have been illuminating.

    Cheers

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