A “late cycle” sharemarket?

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Perpetual Private Insights

Luke McMillan, National Manager, Investment Advice at Perpetual Private, explains the sudden resurgence in volatility in late 2018 and how to invest in a late cycle sharemarket.

After a long period of quietude, investors had their Christmas holidays spoiled by a sudden leap in volatility and an equally sudden fall in prices. In this video interview Perpetual Private’s Luke McMillan looks at what drove the dip and also how to invest when the sharemarket and the economy are “late cycle”.

Volatility Returns

For much of the past three years investors benefited from an almost eerie period of low volatility. As often happens, the sudden return to “heightened volatility” was a shock to the system. The Australian sharemarket (represented by the S&P ASX 300 Accumulation Index) was down over 4% in 2018.

In the videos below, Luke McMillan, National Manager, Investment Advice at Perpetual Private, looks at the big four factors driving volatility in the last quarter of 2018. More pertinently he has important things to say about the outlook for 2019 and what life can be like in the late stages of the sharemarket cycle.


January saw much of the sharemarket fall reversed as the prospect of a better US/China trade relationship improved and the US Fed looked less likely to raise interest rates again.

 


One predictor used for medium to long-term performance are valuations. At present, the US sharemarket remains relatively expensive. Valuations for emerging market shares look reasonably attractive. Australian, Japanese and European shares are now back at valuations close to their historical averages.

 


We are currently “late cycle” not end-of-cycle. That means investors may still benefit from exposure to sharemarkets. However, as we near the end of the cycle, quality and size are important to consider. Large cap stocks typically are more mature and have more diversified revenue streams, which may assist if facing economic weakness or market shocks.

 


Cheap money (quantitative easing and low interest rates) mean growth investors – those who buy companies with a bias to fast revenue growth have been winners over the past few years. By contrast, value investors – those who look for predictable earnings and like to buy when companies are “cheap” - have been on the wrong end of the performance tables. Luke suggests there may be a higher probability of value stocks to do better over the medium to long term.

 


The big question for investors is how much growth to go for as we near the end of the cycle. This is not time to be too greedy – or too fearful. Expert advice makes a difference.



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Perpetual Private advice and services are provided by Perpetual Trustee Company Limited (PTCo) ABN 42 000 001 007, AFSL 236643. This information was prepared by PTCo. It contains general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The information is believed to be accurate at the time of compilation and is provided in good faith. This article may contain information contributed by third parties. PTCo do not warrant the accuracy or completeness of any information contributed by a third party. Any views expressed in this article are opinions of the author at the time of writing and do not constitute a recommendation to act. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.