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Are Equities Oversold or Overbought?

At the close of market on Friday the Australian Market (All Ords) was down 4.87% after a record run in April. We are still heavily weighted to cash, which does require some resolve to maintain, both while the market is racing ahead and at the same time when you get days like today when the market is sold off nearly 5% in one day.

The market appears on the one hand to be factoring in unprecedent economic stimulus and that there will be a staged re-opening of economies and on the hand the real impact of high unemployment, increased debt levels, long term changes to the way people live their lives. The tipping point today was poor economic data coming out of Europe.

Longer term investors are looking at their holdings, in some cases saying that while the business may be impacted adversely for a few years this represents a good time to be averaging down or buying the business at depressed prices. The problem with this way of thinking is that businesses need to be valued on the cash and profits they generate. Even if you ignore the next 6-12 months and look past that ,some business just won’t be the same, others represent god buying if you take a long term view and your confident that the business can return to doing the same as it did before and that possibly more debt and equity wont impact the business to a great extent.

My view is that there are so many businesses that as yet don’t know the full impact of shutdowns. You can do all the scenario analysis you like of increased debt, increased equity, reduced revenue and reduced cash flows, but a lot of what is occurring now is pure guess work. GDP will fall globally. Unemployment is already high, and we have no idea of when those jobs will come back as many businesses just won’t survive. I still feel that many companies have seen their shares prices rally to expensive territory, when there is great uncertainty around the future earning of the business.

When you look at the provisions that the Large Australian banks are taking, that does tend to support my view that they are expecting a significant level of bad debts. There are flow effects when companies can’t pay their bills and the banks normally have some form of security for lending so they rank further ahead of the unsecured creditors.

To sum up we still think that it’s a buyers market. You will get opportunities to buy good companies but you will have to endure the volatility that is going to drive the market until investors get confidence about earnings.

Have a good weekend


Any information has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives., financial situation or needs, It is not an offer or invitation for subscription or purchase, or a recommendation of any financial product and it is not to be relied on by investors in making an investment decision. Past performance is not a reliable indicator of future performance. To the extent any general financial product advice is provided in this document, it is provided by Glennon Capital Pty Ltd ACN 137 219 866, AFSL No. 338 567. An investor, before acting on anything construed as advice, should consider the appropriateness of such construction and advice having regard to their objectives, financial situation or needs.

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