An occupational hazard of writing a weekly sharemarket column is identifying opportunities during periods of high sharemarket volatility. While investors want “buy” or “sell” ideas, the best approach is watching and waiting for better value as volatility exhausts itself.
This is no time to dive aggressively into the market or be a hero and try to pick the precise turning point. Unrelenting market optimism from those who promote or manage financial products can lure investors into savage value traps.
Make no mistake: equity markets have serious challenges. Capitulation in parts of the resource sector is raising fears about the exposure of investment banks worldwide to commodity derivatives that magnify losses if resource companies go under. Commodity derivatives are the likeliest candidate to trigger the next global financial crisis, like mortgage-based securities did in 2008.
A bigger worry is the ability of central banks worldwide to deal with financial crises. With monetary policies stretched the limit in many markets, central-banks are rapidly running out of ammunition – and market confidence. Governments, too, have less capacity to bail out busted businesses given their fiscal strains and austerity needs.
For the record, I don’t expect the current turmoil to morph into another crisis. Plunging oil prices will, in time, provide a stimulus for energy-importing countries, and sovereign balance sheets in emerging markets are collectively stronger than in 2008. Falling commodity prices will also drive a swifter supply response, paving the way for an eventual commodity-price recovery.
But risks are rising. Investors must ensure they have appropriate cash holdings in portfolios, and avoid speculative stocks and beaten-up resource companies, assuming a turning point is imminent. A miner that falls from $40 to $15 looks cheap, until those who buy at $15 watch it sink below $10 and lose half their investment.
The view I mapped out for The Bull so far this year stands. The S&P/ASX 200 index needs to test and hold around the 4,900 mark several times to confirm support. A significant, sustained break below 4,900 could take the market towards 4,600 points.
Volatile trading conditions will characterise at least the first half of 2016 . But when it becomes clear equities are stabilising, investors could look to buy the “market” through an exchange-traded fund (ETF) over the ASX 200 index or the ASX 20 index. Although it seems hard to see the ASX 20 outperform, given its high weighting in banks and BHP Billiton and Rio Tinto, there is scope for recovery given the index’s underperformance.
Another view was to focus even more on blue-chips with reliable, fully franked dividends in 2016. Capital growth prospects look muted as pressure on corporate earnings grows and investor sentiment deteriorates. Much of the market’s total return this year will come from dividends if current global volatility persists. Don’t get sucked in by inflated headline yields based on historic dividends per share – what matters is dependable, future dividends.
My other strategy, outlined last week, was focusing on defensive utilities or infrastructure stocks such as Sydney Airport and road operator Transurban. Commentators often pay lip-service to “defensive stocks”, but it’s when economies slump that one is reminded of the power of owning companies that are less cyclical and have genuine “economic moats”.
I’m adding Macquarie Atlas Roads Group to the list of infrastructure ideas this week. It has interests in toll roads in France, the United States, Germany and the United Kingdom – and has produced stellar returns over one, three and five years.
The Autoroutes Paris-Rhin-Rhône (APRR) is Europe’s fourth-largest motorway group. It is a key asset for Macquarie Atlas and a good example of how it is creating value. Macquarie Atlas this week announced a 10-month concession extension of APRR in exchange for shortening the life of the Tunnel Maurice Lemaire (TML) concession. TML is an 11-kilometre road in eastern France and relatively small in the context of APRR.
Chart 1: MQA
Source: The Bull
The French government has extended concessions for variations in capital spending a few now, and its highlights how Macquarie Atlas has several opportunities to extend toll concessions and boost revenue in coming years on its European roads. Like Transurban, it is showing the market that the concession extensions across its road network – and solid traffic volumes on most of its roads – provide long-term growth opportunities.
Macquarie Atlas has rallied from a 52-week low of $2.92 to $$4.21 and its share price rose in January as the broader market fell. Three of six broking firms have a buy recommendation and three have a hold, based on consensus analyst estimates. A median share-price target of $4.28 suggests Macquarie Atlas is fully valued at the current price.
It is due for a share-price consolidation or pullback after such strong gains in the past 12 months and is a candidate for profit taking in this weak market. However, any sustained price weakness below $4 might provide a buying opportunity for long-term portfolio investors who understand the value of owning defensive infrastructure assets.
Macquarie Atlas’ expected dividend yield of almost 5 per cent this financial year (unfranked), based on consensus analyst estimates, is another attraction.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at Feb 4, 2015.