Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Non-bank financial stock seemed to be a particularly good buy, says Deutsche. Photo: Reuters
Savvy investors should start buying up shares, according to Deutsche Bank and AMP Capital, with the recent dip in the market presenting some good buying opportunities.
And non-bank financial stocks like Perpetual and Iress seemed to be a particularly good buy, said Deutsche.
"The equity market has fallen 5 per cent since its peak in late April, qualifying as a dip," said the strategy update from Deutsche Bank. "From here, we expect the market to rise, and advise buying the dip for four reasons."
The four reasons were:
the dip was due;
valuations are reasonable;
earnings momentum looks OK; and
the current lack of analyst sentiment is actually positively correlated to market performance.
Regarding the recent dip in Australian shares, Deutsche noted that a correction was well overdue. "There has been 50 to 60 days on average between market falls over the past six years. The market lasted 94 days this time, so a dip was due," said Deutsche.
"The strong rally also suggested a dip was due – the market rose 16 per cent from the last dip to the most recent peak, compared to a 10 per cent average."
Deutsche added that its price-earnings ratio model suggested fair value was a PE ratio of 15.7. The current market had a ratio of 16. "Valuations have dropped to reasonable levels," said Deutsche. "It is justified given record low real interest rates."
The market PE ratio also looks reasonable relative to that of global markets. "Australia is back to a 2 per cent premium, in line with history."
Earnings – as measured by the earnings revision ratio and earnings forecasts – "are OK", said Deutsche. "The decent earnings backdrop also gives us confidence to buy this dip."
Lastly, the current poor levels of analyst sentiment were actually a good thing. "In the longer term, bearish sentiment has actually led to rising markets. It seems the lack of exuberance can lead to more orderly market conditions."
Non-bank financial stocks were particularly "attractive at current levels", said Deutsche. "They have underperformed most other sectors given their earnings are leveraged to the market. We expect a reversal."
These stocks included AMP, ASX, Challenger, Computershare, IOOF, Iress, Macquarie, Perpetual, Henderson Group, and Magellan.
Deutsche said they had just added AMP to their model portfolio, along with Perpetual and Iress.
AMP Capital chief economist Shane Oliver also said he believed the market would pick up.
"Recent volatility represents just another correction," he said. "We remain of the view that we are still a long way from the peak in the investment cycle."
However, there were three of four "wobble drivers" affecting the global economy and volatility could have further to go, he said.
These wobble drivers include the fact that May to November usually produced the leanest returns in sharemarkets, and rate hikes by the US Federal Reserve were usually associated with falls in the sharemarket.
"The start of the last two major interest rate tightening cycles by the Fed in 1994 and 2004 were associated with falls in US shares of 9 per cent and 8 per cent," Dr Oliver said.
Greece is another concern, although he said "Europe remains far stronger than it was in 2010-2012 with significant budget repair and economic reforms and the European Central Bank's quantitative easing program. So a Graccident or even a Grexit is unlikely to derail the Eurozone economic recovery. But it could cause volatility."
Other "wobble drivers" are China's slowdown (although momentary easing should ensure growth comes in at the target rate of 7 per cent) plus geopolitical threats, namely Ukraine, Islamic State, the South China Sea, and Ebola. Dr Oliver said these threats "remain but have faded a bit".
Dr Oliver said Australian growth is likely to remain sub-par, but like other concerns this was unlikely to threaten the broader cyclical bull market. "The ASX200 should make 6000 by year's end."