Dive back into the market

It’s not too late! That’s the key message for cashed-up investors who feel like a deer caught in the headlights and cannot make up their minds whether to re-enter the sharemarket.

On the surface, this may seem a tough call given the S&P/ASX200 has risen more than 60% from its bear market low almost exactly 12 months ago to reach its highest point for 18 months.

And yesterday, the market burst through the 5,000-point barrier – a key psychological marker in its extraordinary comeback.

The bottom-line is that investors have powerful reasons to believe the market will keep rising for some years, and they shouldn’t overly focus on returns forfeited to date if they were out of the market.

As Prasad Patkar, portfolio manager for Platypus Asset Management, realistically says: “The quick bucks have been made”. No longer are “companies priced to fail which we knew weren’t going to fail.”

But Patkar believes there is a solid case for cashed-up investors to re-enter the market now – provided they are investing for the long-term and not chasing quick, easy money.

The strongest corporate reporting season for years and expectations for rising profits on the back of improving local and global economies suggest to many market professionals that shares are in the early stages of an extended bull market. Further, companies are enjoying the rewards of sharp cost-cutting during the GFC.

David Cassidy, chief equity strategist for UBS, has a simple message for cashed-up investors who are thinking about re-entering the market: “Equities are still moderately undervalued. Valuations still look quite reasonable – particularly on forward earnings.”

Cassidy expects the market to reach 5,500 by the end of the 2010 calendar year. And he believes that inevitable market dips in this volatile market will produce good buying opportunities for investors who are ready to jump.

Shane Oliver, head of investment strategy and chief economist for AMP Capital Investors, says to cashed-up investors who can’t make up their minds whether to now re-enter the market: “My view is that the market is still heading higher [but] with more moderate gains.” His year-end target for the S&P/ASX200 is 5,600.

“If history is any guide, there is much more upside to come and we are nowhere near the peaks,” Oliver adds. He points out that the average cyclical bull market in Australian shares lasts four years and produces gains of 132%. “But so far we have only seen a portion of that.”

While Oliver says shares are no longer trading at “dirt cheap” prices, they are not expensive. Their price/earnings multiples (P/E) are still below their long-term average of 14 times. And he expects that corporate earnings will rise by 20% over the next 12 months.

Oliver says AMP Capital Investor’s figures for its investors show that there are “lots and lots” of people who moved into cash during the bear market and are still in cash today.

Prasad Patkar’s “gut feeling” is that the market will be higher in 12 months time. But over the next two months, he expects the market to move between 4,500 and 5,000 until the world economic outlook becomes clear.

Ideally, the best time to buy would have been 13 months ago before the market sprung back into life. But investors rarely manage to correctly time the market – picking the best time to buy or sell – and attempting to do so usually results in losing money.

Perhaps keep in the back of your mind for the next market downturn that you will pay a high price for missing the sharpest rebound in share prices which usually occurs in first year of a market’s recovery.

Here are five tips for moving cash back into the market:

1. Drip-feed your purchases: Don’t put all of your cash back into the market at one time – invest progressively in equal proportions every month or quarter, over perhaps 12 months. This will reduce the possibility of investing shortly before an abrupt fall in prices. And you will average-out your buying costs.

2. Buy in market dips: This volatile market will inevitably produce dips in prices. Cassidy and Oliver say this is a time to buy.

Oliver suggests that a strategy is for investors who are drip-feeding their way back into the market – as discussed in strategy one – is to progressively buy more stock during market dips.

3. Keep gearing at cautious levels: Reserve Bank statistics show the outstanding debt on margin share loans is on the rise again – after falling from a record high to a long-time low in the GFC fallout.

A particular danger now is getting carried away with market optimism and taking excessive debt, which caught out numerous investors during the bear market.

4. Consider mixing an index fund and direct-share strategy: Among the biggest beneficiaries of the market rebound to date, have been investors in low-cost, market-tracking index funds.

But with the highest gains from this recovery surely behind us, more investors may decide to use the strategy of investing in both index funds to replicate a chosen market and carefully-selected direct shares and/or actively-managed share funds.

In Patkar’s view, this a stockpicker’s market after the extraordinary gains with particular opportunities for investors who are highly selective. (Platypus Asset Management is an active funds manager.)

One of the risks with stockpicking of course is selecting duds yourself – or not having a professional adviser or fund which succeeds in its stockpicking.

Cashed-up investors wanting to re-enter this market could consider using an index fund as the core of their share portfolios and direct shares/and or actively-managed funds as “satellites”. The performance of your widely-diversified core portfolio should mirror the market.

This core/satellite approach is a safer way of re-entering the market than relying on a small number of selected shares. This would be particularly the case for inexperienced investors who are uncertain about where to invest.

Many more investors are turning to low-cost exchange traded funds (ETFs) that track a chosen market such as the S&P/ASX300 as the core of their portfolios. ASX figures show the market capitalisation of exchange traded funds listed on the local market rose by 150% in the 12 months to March 31.

5. Look to potentially winning sectors for direct-share component of your portfolio: Market professionals believe that certain sharemarket sectors will standout at this stage of the recovery. Here are a few suggestions of Cassidy, Patkar and Oliver.

Oliver: “We are very positive in resources given the China growth story.” He expects resource company earnings to rapidly increase. And he also points to the consumer discretionary sector such as electronic retailers (which should benefit from increasing employment and household wealth); airlines (with the stronger Australian dollar keeping fuel prices down and rising passenger numbers); and telcos (given share prices have fallen so much).

Cassidy: Sectors that he is “comfortable” with include mining, mining services, banking and media.

Patkar: “Health care is an outstanding source of out-performance, depending on the dollar.” He specifically includes Sonic Healthcare, Cochlear and ResMed. Patkar also points to consumer discretionary (naming JB HiFi and David Jones, praising their business models); and banks (“powered through crisis” and should reverse bad-debt position over next 18 months or so).