With the global market rally continuing Chief Investment Officer, Steve Johnson, provides his insights into the action packed week that the global stock market has had with the ASX up 6%. Steve also discusses whether the rally is unjustified, and if it has gone too far, as well as the psychology that may cause these market shifts and opportunities.
I’m Steve Johnson, Chief Investment Officer at Forager Funds, joining you for another Friday video. I’m on my own again this week. I promise I’ll get one of the team back next week, but today it’s just me. It’s been another action packed week on global stock markets. The ASX, as I record this on Friday morning, is already up 6% for the week and has retraced more than half of the losses from the February and March meltdowns and now is trading some 14% from its February highs earlier this year.
A lot of headlines still in the paper about people screaming that the rally has been unjustified. In fact, there was an article from John Shapiro in yesterday’s AFR saying that 90% of professional fund managers think this rally is gone too far and called it a ‘fool’s rally’.
I’m clearly in the 10%. I’ve been pretty bullish for the past few months based on prices, rather than any view of the economic outlook. But I want to talk a little bit today about the psychology that actually causes these markets and opportunities. The fact that 90% of people are, pessimistic is not a coincidence, it’s a precursor to us having bear markets and you should expect to see it every single time we go through one.
First, the general backdrop here. Back in March, I thought the 40% correction for the market was a dramatic overreaction to what was happening out there. And it’s important to put it into the context of not just the daily price, but what does this actually mean? When you buy a stock, you’re buying a part of a business. When you buy the Australian stock market, you’re buying a share in most of Australia’s corporate profits for as long as you hold those shares. So if you’re marketing the value of that down by 40%, you’re assuming that those companies are going to pay you 40% less in dividends and like 40% less in profits for the rest of their lives.
I think even if this crisis health crisis lasted for years, that was an overreaction to the economic impact on Australia. But what we have seen is a much better than feared health crisis here in Australia, in particular. The numbers are looking very good and the economy is starting to get back to normal much earlier than most people had expected.
We’ve had a couple of companies in our portfolio coming out and saying that their results have been reasonably good. For some of those, like National Tire and Wheel in our Australian fund, we would have thought that business had been pretty dramatically impacted by people not driving their cars very much. But they put out a decent update this week and said, actually we’re going fine.
Eclipse group, a car leasing company, has probably put out four announcements like that over the past few months. Their share price was hammered from a $1.80 down to as low as $0.50 in the crisis. And they’ve put out a number of announcements saying, we’re fine.
I think we’re now in an environment where people are starting to spend money again. A lot of companies are still getting significant amounts of stimulus from the Australian government. I think you can expect to receive not great results, but better than expected results coming over the next few months.
I’ve always said that psychology is more important than financial analysis when it comes to the financial markets. In fact, I have said that I think we could make money just focusing on people’s psychology and not worrying about the financial side of it at all. And this comes to this whole pessimism in the middle of middle of bear markets.
You do not get bear markets without people being pessimistic. So if you want to buy bargains, you need to look around and see how much people are panicking. And when you think that panic is at its maximum, that is the time to think about buying. The opposite applies on the other side, when you’re reading the headlines in the paper and all those fund managers are saying, the coast is now clear and it’s a great time to be investing in equities, you can probably assume that the rally is over. We’ll have our monthly reports out next week so keep an eye out for those. I’ll be back to record another video next week. Thank you.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.