Summer KiwiSaver's Martin Hawes says good value companies that are found and bought in this volatility will look very good in a year or two, despite some rough moments in the meantime

Summer KiwiSaver's Martin Hawes says good value companies that are found and bought in this volatility will look very good in a year or two, despite some rough moments in the meantime

By Martin Hawes*

Market volatility is a great opportunity for investors. At the moment, by many measures, shares look cheap and it looks a time to start to buy. The challenge is to pick the exact bottom so that you get the lowest price; the trouble is, lacking a crystal ball or tarot cards, that is near impossible.

It is at times like this that I fall back on old investment sayings. The world is full of these short, pithy maxims that investors have repeated for decades and which sum up what you should be doing in a given circumstance. As such, their veracity has stood the test of time and they give guidance in troubled times. Like now.

For an active investor, the fall in oil prices, the COVID-19 virus and the resultant equity market volatility create opportunities for investors. As I write, shares are on sale with a near 20% discount and the only question is how to take advantage of the situation.

I do not know if the discount is about to get deeper or when the sale might end. It is possible that shares get cheaper and they stay cheap for a year or two. To invest now may mean missing out on these sharper prices and having to hold on while watching further price falls. This is the “bugger!” factor; buying now only to watch the market fall further.

On the other hand, we may already be at the bottom and the recovery happens next week taking the opportunity to pick up bargains with it. No-one wants an opportunity to disappear before they have taken advantage of it.

And so, investors have two opposing worries: on the one hand there is Fear Of Missing Out (FOMO) but on the other hand buying too early and missing the real bargains.

What to do?

The one old saying that is rattling around in my head at the moment is: Only one person buys at the bottom.

This adage is really telling of the near impossibility of buying right at the bottom and speaks of the futility of even trying. I believe that we have to give up on the idea that we will be that one person who hits the very bottom and instead make a series of purchases as the market dips and recovers.

We need to buy value as it appears but make multiple purchases over time; make several small purchases rather than just one big one. Do not try to heroically pick the one time to buy – spread your purchases over a period so that you are buying towards the bottom, rather than trying for the very bottom.

Nothing is certain but these things look most likely:

  • The COVID-19 virus will cause a drop in profits, but this is most unlikely to make a permanent dent in company performance. Shares are a perpetual security (you get your share of the profits for as long as the company exists). In the long run, any temporary fall in profits will probably be a hiccup.
  • At the moment, following the falls, shares are good value – by most measures there are companies on sale cheaply which, if you buy over the coming weeks will look good in a few years time.
  • When this market turmoil finishes, we will be left with very low interest rates. Low interest rates are very good for equities and share prices will rebound.

I expect that good value companies that are found and bought in this volatility will look very good in a year or two. Yes, there may be some rough moments in the meantime, times when you wished you had waited, but for those who are patient and invest their money in a series or tranches spread over time, this will be a profitable period.


*Martin Hawes is the Chair of the Summer Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd and a Product Disclosure statement is available on request. Martin is an Authorised Financial Adviser and a Disclosure Statements is available on request and free of charge at www.martinhawes.com. This article is general in nature and not personalised advice. Summer competes with banks and other KiwiSaver providers.

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A heroically brave call to advise to buy shares now. I absolutely agree that trying to pick the bottom (or top) of the market is near impossible but I would rather buy too late (after the market has bottomed) than too early because no one knows how much it still has to fall.

Come on Yvil - tell us its a good time to buy a house!

"A heroically brave call to advise to buy shares now"

For those with a longer investment time horizon, this is the time to look for opportunities. Prices of shares are more attractive today than they were 5 weeks ago.

Or even 9 years ago depending where you're buying...

There are some companies that do well in times of uncertainty, such as these.

Dollar cost averaging...just not sure I'm quite ready to put my cash back in yet....

No, I would not put much or any cash in yet. But do remember: sometimes these things can turn quickly

Doesn't dollar cost averaging give the best returns over the long-run?

Not necessarily the best, but should also protect you from the worst. Just makes the ride a bit smoother.

I put a small amount of money in today...

It’s so very tempting. I guess we don’t know how deep or long this retreat (recession?) could go. I’m giving it a few more weeks.

Putting a small amount in, but not everything is ok.

There were good opportunities last time this happened in 2008, but the dow was 6500. Even after falls so far dow is still over 21000. Many PEs still at perfect world levels. We are not perfect world right now. I dont think we are at the bottom, but I could be wrong.

Justa, I do not think we are at the bottom yet - in fact, I think that USA will be down overnight. But you can never be certain

ASX and FTSE seem to be approaching reasonable levels (although you'll have to dodgy a few bankruptcies - especially in the UK). I agree on the US, their incompetent leadership and third world approach to public healthcare is about to strike - things are about to get ugly...

Also as a slight side WHO pandemic bonds are going to cash out in early April - $500m dropping out of an already crumbling market probably won't help.

JC the Spanish Flu of 1918-19 is possibly more comparable. The Dow whipsawed around a bit during it but at the end as the disease subsided it took off by 50%.
The great unknown seems to be how much of it was the euphoric atmosphere brought on by the end of the war at the same time and also how much of the rout now is caused also by the oil fall and also the US election.

"At the onset of the outbreak, the Dow Jones Industrial Average was up about 60% from the depths of the war. The market dipped about 8% during the flu pandemic. The market, broadly speaking, had been trading in a tight range for a decade and didn’t break out until 1922.."

https://www.globaltrademag.com/the-spanish-flu-and-the-stock-market-the-...
https://www.barrons.com/articles/dow-opec-coronavirus-election-year-pand...

Thanks for the advice.

Recovery is going to be slow. Earnings are going to be (way) down, with some dividends suspended already. Air NZ being one. It generally takes 2-3 years for people to have the confidence to open their wallets again after corrections of this nature.

Assets might then be priced according to risk, rather than speculation. Sustainable dividend yields of 4% for blue chip stock seem to give an appropriate risk margin for the cost of money. You be the judge!

What we do know its a whole lot of printed money has evaporated, and the ponzi scheme central banks have been playing is over. The answer all along has been to be give money to people who need it most, rather than subsidising bad business behaviour that cartel businesses, the banks and monopolies have been getting away with for too long.

Suspend the export of dividends might be a good first step also.

People should consider the above in the context of their personal financial circumstances.

Any money needed in the next 3-5 years should be invested in cash or conservative funds. This would include retirees, those nearing retirement (say within the next 3-5 who will need some cash funds), those looking to use as a deposit to purchase a owner occupied residence, and those who may need emergency funds to pay for living costs in the event of a recession.

Money invested in shares should have a minimum 5-7 year timeframe to allow time to ride out market price fluctuations.

Yes - short term money needs to be conservatively invested

My take, invest hard on infrastructure, RE related industries, eg. Fletchers - Even in the midst of outbreak, patients need to be put under the roof. Without it, plastic tent? - but you all got the point.

So, I have no active personally directed exposure to shares but am interested and not put off by the current climate. What would be the most cost effective platform for me to invest through? As in sharesies etc. I would be able to put aside perhaps $200 a month or a sum in that magnitude/frequency. I would be mostly interested in having control over what companies to buy shares in.

Sharsies might be a good option. Direct Broking have $30 fee per trade I believe. Think ASB securities might be the same. A broker might be around $100 for NZX then quite a bit more for foreign exchanges - so you want to limit number of transactions and note % of total investment

" (you get your share of the profits for as long as the company exists)"
So pick up some Air NZ now then?!
That's the Big One - which companies will survive this?
Will Skyline Enterprises or Totally Tourism make it through? Maybe, maybe not.
Buying is not all about the opportunity as it presents itself, but survivability in the long term...and that is going to be the difficult one to pick.
Who would have thought Deutsche Bank, one of the largest financiers in the World not that long ago, would be trading where it is today, and asking "Will it be there tomorrow?"
"ASX crashes 10pc" and more of those to come....
And, of course, people have to have the capacity to buy. What happens if this suggestion from The States this evening takes hold here, there and everywhere?
"Then there's the most massive asset bubble of all, real estate. Millions of properties delusional owners still think are worth $1.4 million will soon revert to a more reality-based valuation around $400,000, or perhaps even less, meaning $1 million per property will melt into air."

I will buy back in after the US has recovered from the Virus and not before. It still has a long way to go in my opinion and it will be interesting to see how the US handles this along with Australia. Given Boris's call if I was in the UK and a Boomer I would do everything to get out of the UK.

Phew...what a busy few days, I've been sucking up cheap shares like an Orca snaps up stingrays on a sunny afternoon in the shallows.....quadrupled my holdings and more, much more to come, if it wasn't for the bandwith issues on my trading sites it would have been even more...this time next year I'll be setting up my own stock exchange!

Very good, sensible comment Martin.
I agree that already low interest rates are plunging even lower right now, and that much lower interest rates in the foreseeable future will see even more investors buy into the stock market when their current bank term deposits expire.
The funny thing is, is that I worry about my bank term deposits more than my blue chip shares even though they have taken a real haircut over the past week or so.
There are one or two stocks whose slide I cannot fathom: Z energy is homing in on just $3 a share and yet they will be paying a 40 cents dividend in a couple of months and even if less fuel is used over the next year or two, nobody is going to rush out and buy a new electric car at $60,000 over the next few years.
Also, Fletcher's shares should pick up if the touted huge infrastructure spend-up ensues.

thats the market signal to accumulate, the short sighted in the market are dumping and running with what they have in their pockets. Broadly speaking you should be moving into defensive and institutional companies like this during a bear, go get your fill and see you on the upside

Thanks 4th have enjoyed watching your commentary and have picked up a few things. Where would be a starting point for these 'defensive and institutional companies'? Thanks

I guess if consumption/revenue falls next few months ZEL dividend could drop at some point. Not sure if it will influence this div?

Martin - any particular industries catch your eye? I have USD and EUR sitting with the broker ready to invest...Or do you think now/near future might be a good time to start bring foreign currency back to NZD?

No industries really stand out for me at the moment. Energy stocks may have to get over a Tiwai Point hump at some point. Aged care will perform when everything settles. I would be wary of bringing back FX to NZD - who knows what may happen in NZ yet.

Great - good advice. Thank you.

I see FPH has just issued a second profit guidance, upwards.

Not sure if I agree with your age care companies. They are essentially property companies, who don't pay tax.

While there is no evidence yet of a property crash, few will want to buy in this turmoil but some will have to sell through loss of jobs. Pity easy to figure this one out. Children might take to caring for their parents directly for a change; which wont be a bad thing; especially when faced with $3,000 a month bills going out of the estate.

Government will have to make some tuff calls now, and these aged care operators with be in the gun. Its better than riots in the streets by youth out of work and homeless.

Many of the companies that make it may be great value. Not all will.

As for the recovery it depends upon consumers. If they've taken a beating the recovery will be slow as we saw after the last recession, but, if they've been well supported by policy throughout the bounce could be very rapid with little long term damage.

"The challenge is to pick the exact bottom so that you get the lowest price. . . "

Not a challenge that a sensible person would take. No way!

I'm more than happy to leave that sort of thing to the highly-paid professional fund managers, advisors, analysts and the rest of that tribe.

The object is to identify when the downtrend has stopped, and either a period of relative stability has begun, or an uptrend has started - I am more than happy to be within about 20% of the bottom, but on the way up

You would be crazy to be buying shares at the moment as there is still downside.
Financial advisors are the last ones you should be listening to, when they were all aware that the sharemarket was grossly overpriced, however they
Continued to be buying up shares as it wasn’t their money they were going to be losing.
Property will continue to be the safest and most profitable investment you can make.
Provides good constant income and capital appreciation if purchased right .
Shares or property it is a no brainer.
Financial advisors are biased as they get paid whether the market goes up or down

And houses aren't grossly overpriced?

And no bias for you to declare around property?

All betting on a return of yesterday.

Yet the warning that tomorrow will at some point inevitably be unlike yesterday, has long been sounded.

Just some advice, you ask if housing is overpriced?
No housing in NZ is not overpriced in most locations.
When you can buy homes for under the cost of renting then housing is very realistic!
Rental Returns nowadays of 6% is obtainable and with interest rates of around 3% going to be around, housing is the asset that is going to be the investment of choice.
Equities have always been a total gamble and everyone invested in them are unfortunately going to be financially disadvantaged as there is no sign of the bottom.

Choosing the right tenants is just as much of a gamble. I have had a rental trashed and it is not a nice experience. Besides, over time, even with good tenants the landlord will have to attend to: taps, toilets, mould, carpets, curtains, heaters, showers, insinkerators, lawns, gardens, letterboxes, gates, gutters, roof, painting, automatic garage doors, leaks, rot, water-main, fences, records, tradesmen, tax returns ......don't get me started!
I also have a share portfolio and it's true that if you have had even a relatively conservative portfolio since the GFC then you should have done better, with far less hassle, than property.

There's an old expression of "show me a person (used to be man) who bought at the bottom and sold at the top and I'll show you a liar". Also timing is everything in shares if you can get it right.

Anyone who brought in the dip of the GFC and sold last month is a very happy camper. The same opportunity will happen here. When you decide to jump in is up to you but when you do, just ignore everything for the next year or two and you will be fine.

I wonder how much the continuing influx of KiwiSaver money will prop the downward pressures on the NZX? Am i right to assume we've never had the makings of such a downturn with this many members? Naturally not all will be part of a domestic share scheme, but there would be a fair number.

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