It was yet another brutal week for Australian investors, with global economic woes sending Australian shares tumbling 5.9% over the week to a two-year low. A whopping $71 billion was wiped off the local market, meanwhile Wall St lost $1 trillion. The Aussie dollar fell below parity and commodities were hammered, with copper, silver, gold and oil all haemorraging. Silver plunged 18% on Friday, copper was down 6% and even the ‘safe-haven’ of gold wasn’t spared, diving 6% for the day.

It wasn’t the downgrade to yet another European basket-case, Italy, that was the catalyst for the slump, nor was it Moody’s downgrades to three US banks. It wasn’t the poor economic figures that came out of the Eurozone. Investors are well aware of Europe’s woes and US bank debt. It wasn’t even the weaker numbers from China, with a manufacturing index down for the third straight month. Rather it was the string of negative comments from the big three – the IMF, the World Bank and the Federal Reserve – that caused widespread panic.

IMF’s Managing Director Christine Lagarde:

‘Our view is that the current economic situation is entering a dangerous phase.’

‘We have reduced our forecast on a global basis, by regions as well, and we see downside risks on the horizon.’

‘(Compared to 2008) They don’t have as much maneuvering room now, they don’t have as much ammunition.’

World Bank President Robert Zoellick:

‘The world is in a danger zone.’

‘In 2008, many people said they did not see the turbulence coming, leaders have no such excuse now.’

‘I still think that a double-dip recession for the world’s major economies is unlikely…but my confidence in that belief is being eroded daily by the steady drip of difficult economic news.’

‘There is a darkening outlook for developing countries.’ 

The Federal Reserve:

‘There are significant downside risks to the economic outlook, including strains in global financial markets.’

If that wasn’t enough, the G20 Finance Ministers had this to say:

‘Heightened downside risks from sovereign stresses, financial system fragility, market turbulence, weak economic growth and unacceptably high unemployment.’

Most notable was the International Monetary Fund’s downgrade of its growth forecasts and the Federal Reserve’s use of the world ‘significant’ when referring to the risks faced by the United States economy. It’s hard not to raise an eyebrow at the timing of these comments – the IMF and World Bank are holding their annual conference this weekend, in Washington of all places. Is it possible that the trio put out such negative comments so as to send global markets into a tailspin? It would certainly put them in a good position to ride out on a white horse on Monday (US time), with plans to ‘solve’ all of the world’s ills. Keep an eye out on this.

The negativity pushed the All Ords below 4,000 for the first time since July 2009. It is now less than 800 points above its GFC low.

Many brokers reckon that the selling has been overdone; there are plenty of quality stocks that have been thrown out with the bathwater.

Back on 6th August in our article ‘Are We Near The Market Bottom?,’ published just after the panic selling of 5th August which saw the Aussie drop 4% in a single day, we pointed out that ‘market declines rarely finish on days that see panic selling, such as Friday’s 4% walloping of the Australian market.’

We looked back at recent crashes and subsequent bear markets, showing that panic selling usually signals that a lower low is in store, even if there are rallies along the way. ‘The days on which previous bear markets registered their lows were nothing like the crash on Friday and the ultimate bear market low wasn’t found until much later,’ we wrote.

Shares have certainly pushed lower, with the ASX200 hitting a two-year low on Friday amidst widespread selling. The table below shows the dates of previous bear markets, with the current one now in its ninth week.

 Bear market  Years  Date of plunge  Date of bear market low  Weeks to hit the bottom
GFC Mark II 2011-? 22/7/2011  ?  ? (8 weeks and counting)
 GFC  2007-2009  29/09/2008  6/3/2009  23 weeks
 9/11  2001-2003  14/09/2001  13/3/2003  78 weeks
 ’87 crash  1987-1987  19/10/1987  4/12/1987  6 weeks

 

In the article we also stressed that investors need to calmly review their investments and derisk their portfolios, and this still stands true today. We wrote: ‘Derisk, derisk, derisk – we can’t stress that enough. In bearish conditions, you do not want to hold a portfolio overloaded with penny stocks, or high risk miners…and as much as you love that junior miner that is set to soar, be wary of untested miners in these conditions.’

And miners have been hit hard; last week there were no less than 220 companies that lost more than 15% over the week, and well over half of them were miners. 33 miners fell by 25% or more over the week. Notable falls came from Nexus (-38%), Alkane (-30%), Lynas (-29%), Gold Road (-26%), Murchison (-26%) and Kagara (-25%). The big guns haven’t been spared either, with BHP and RIO down 10% and 12% for the week. The two megaminers have been hammered since July 22nd, down 20% and 24% respectively.

Burrell Stockbroking director Richard Herring believes the solid fundamentals of Australian companies and the economy should prevent shares stooping to GFC lows. ‘I think there is just too much value there, so I’d be really surprised if we got back to that level,’ he said. ‘Even if Greece came out and said ‘we are going to default’, I’m guessing that the market has already priced that in.’

ANZ senior economist Riki Polygenis doesn’t expect a dip back into recession, but warns further inaction from European politicians will increase the likelihood of such an outcome. This weekend’s annual meetings of the World Bank and IMF provide an opportunity for action to be agreed upon, he said. ‘There needs to be coordinated action, and quickly,’ Mr Polygenis said. ‘If all we get is another vague communique in the weekend, then brace for another rout in markets.’

But comments from the meeting are unlikely to be vague, instead it is highly probable that surprisingly positive comments will come out of the meetings, pushing global markets up strongly this week. The IMF and World Bank have their own agenda at play here.

Further hits to commodities prices will not be welcome news for Aussie stocks so watch closely. But for those who missed out on buying during the 2008-09 dip, this week may well be a fantastic opportunity to pick up quality growth stocks at knock-down prices. As always do your research, diversify and pick lower risk stocks that can withstand ongoing volatility.

The list below details new broker buys and upgrades over the course of the week, an eclectic mix of mid-caps including plenty of IT and telecommunications plays such as TPG Telecom, Wotif.com, Seek and SMS Management & Techology (SMX). SMX was covered last month in ‘Broker Buys on the Dip‘. Ramsay Health also makes an appearance, a stock that has gained 9.3% over the past month and was featured our ‘Bull of the Week’ on May 15th. This week’s Bull of the Week Coca-Cola Amatil is another buy, with brokers picking the bottler as a stock to own in tumultuous times.

And while it’s true that there are many resource stocks in the mix – Ampella, Bandanna, Saracen, Adamus, Sandfire, Oz Minerals, New Hope and Iluka – with the significant pressure on commodities prices and weaker global outlook it would be a brave soul to pin his/her hopes solely on a resources play.  

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.