Difficult start to 2016 for share market – opportunities exist for high conviction stock pickers

ST Wong, 11 January 2016

Shares have endured a difficult start to the year with the usual bout of January optimism missing. Sharp falls in the Chinese share market and currency early last week triggered corresponding declines in global share markets, including the Australian share market (down 6% for the week).

From our perspective, the issues investors are grappling have not changed markedly from 2015 —global economic indicators are soft, commodity prices are not showing signs of rising any time soon and geopolitical risks are prevalent with North Korea supposedly testing a H bomb and renewed tensions between the two big oil producers Saudi Arabia and Iran.

What does this mean for investors?

It’s reasonable to say that during the early January period where liquidity is generally lower than normal, uncertainty surrounding Chinese regulatory processes added to investment market volatility. We would expect this volatility to continue to be a feature of markets during 2016.

Two factors affecting the Chinese share market are worth highlighting. First, the implementation of a market circuit breaker in the Chinese share market where a shutdown was triggered on a 7% fall during the day resulted in nervous investors bringing forward selling volumes which exacerbated the sell off. Second, January also coincided with a scheduled end to the selling restriction imposed on major shareholders.

With the developments in China, we observe that Chinese regulators have acted swiftly to address the two factors highlighted above: the circuit breaker has now been suspended and major shareholders sell downs are now restricted. Looking forward, it is not unreasonable to expect China to be supportive of its economic growth. There are significant monetary tools available to the Chinese and these tools are backed by a strong political will to support economic expansion.

In the short term the heightened volatility in investment markets may well have some time to run its course. However, our views have not changed significantly from six months ago. Global economic growth remains low—consequently, monetary policy is likely to remain easy and while we are watchful of currency movements for signs of any emerging concerns we believe that against the backdrop of slow-growth economic expansion and accommodative interest rates, the follow through will be supportive for share markets.

Panic is not an investment strategy, and although the Australian market is following the lead of China and global markets at the moment, our Funds have held up relatively well during this period of weakness and this is reassuring. We attribute this performance to our philosophy of minimising mistakes, buying attractive companies at reasonable valuations and diversification at a portfolio construction level. While periods of volatility can be unsettling to investors, they can also provide opportunities for the astute stock picker.

Our investment strategy is unchanged. As we have highlighted before, periods of indiscriminate selling often provides opportunities for selective buying of high quality companies at attractive valuations. We view periods of volatility as an ideal time to selectively add stocks to our portfolios where appropriate and we will continue to search the market for companies we find attractive at current levels.