Where to from here?

- Fritz J de Boer, CFP | AQUILA FINANCIAL ADVISERS LIMITED


It would appear by many accepted measures that the market is now extraordinarily cheap. It could be argued that an investor who buys a well diversified portfolio of stocks at the current low prices is likely to make a better than average return in the next twelve months, particularly if the stocks are carefully selected based on sound fundamentals. However, as always, extreme care needs to be exercised.

A common yardstick used in determining a share’s value is the “Price to Earnings” ratio (PE). I have noticed a number of commentators suggesting that at the current PE (around 10) the market is very cheap and therefore represents bargain buying. A PE of 10 is certainly very low by historic standards. But care needs to be taken as the earnings figure used in the calculation of a stock’s PE is a historic number. With the downturn in the economy, the earnings of many companies are under severe pressure as consumers curtail their spending. The result is likely to be a much lower level of future earning. If we were to use a forward looking earnings figure then a stock’s PE could well be closer to 15 or 16 rather than 10 to 12. So the robustness of a company’s future earnings needs to be understood to enable a sound decision to be made on how cheap a stock really is.

The PE ratio is one of numerous considerations to be taken into account when buying shares. Some positives to consider:

• We have a new Government and historically, more often that not, the sharemarket has done well after an election.
• Certain defensive sectors are likely to hold up better than other sectors.
• As the economy comes off lows, confidence is likely to return to the market providing opportunities.
• A lot of superannuation money, led by KiwiSaver, will be looking for a home and this is likely to underpin the market going forward.
• Governments around the world have clearly signalled that they will take whatever action is required to ensure confidence returns to financial markets. That does not mean there will not be some further pain.

Overall, there are good reasons to be investing as there are certainly opportunities to be found. After all Warren Buffett, arguably the world’s most successful investor is buying in the current conditions. But it is well to remember also that, like Warren Buffett, investors seeking opportunities in the current market should have a longer term investment horizon. Some of today’s “bargains” may not produce much in the next twelve months but in the longer term they are positioned to perform exceptionally well.

But one final caution. Investors should first revisit their goals and objectives to ensure that their investment decisions support those objectives at an acceptable level of risk.

As always, I will be happy to assist if you are serious in developing a strategy to build a wealthy future. Call me to discuss your options on 04 499 3592 or 0800 90 60 90 or email fritz@aquilanz.co.nz.