Is now the right time to buy shares again for ASX investors?

Australian investors may be pondering whether now is the time to buy back into ASX-listed stocks. Picture: Bianca De Marchi

Earlier this year large number of self managed funds and smaller investors were very fearful as the first COVID-19 wave ravaged the Australian and world economies.

They responded by “going liquid” and selling down their exposure to the sharemarket. Some got out near the top but others sold at levels that are lower than current markets.

But with the Victorian infection rate under control, at least for the moment, is now the time to move back into the market?

These days most large Australian institutions follow the index and don’t make major asset allocation decisions for fear they might get it wrong.

But some smaller institutions and investment managers did substantially reduce their exposure to the share market and, like a smaller investors, are pondering whether to buy back in.

Waiting for the big fall

One such institution is boutique fund manager Nucleus Wealth which is headed by Damien Klassen.

It sold a large chunk of its equity exposure in January and February and since then has been waiting for the big fall. I detailed its deliberations in April

With the end of the year approaching I decided to check with Klassen to see whether he has bought back in and whether now is the right time to re-enter the market.

The simple answers are “no”.

But Klassen is modifying his strategies to look for stocks or industries that are coming through this recovery stage in much better shape than those on the front line.

Accordingly this week’s dip in the market did not trigger a Nucleus Wealth buying splurge. Klassen believes that impact the deeper problems in the Australian business community have been concealed by lower interest rates and the avalanche of cash via JobKeeper and JobSeeker. Other factors hiding the true state of businesses include the deferral of housing and business loan repayments, rent freezes, bankruptcy protection, the ability to trade while insolvent, and similar measures, he believes.

Attack of the zombies

Most of these measures are going to either end or be substantially wound back in 2021 and that’s when the real pain of the pandemic and the emergence of “ zombie” companies will be felt by many business enterprises and consumers.

On the other hand, interest rates will stay low, although the recent fall in US bond prices was a warning that there is always the possibility of surprises.

The withdrawal if the emergency aid measures will curb recovery in many areas of the economy and that will be the moment of truth for the sharemarket.

Economies that have been hit as hard as Australia rarely recover to their former levels quickly. Obviously an effective vaccine would accelerate that process, and there was good news overnight from AstraZeneca, which is making one of the vaccines Australia has purchased. Ahead of us in 2021 will be falls in the value of retail and office buildings, which will impact banks.

In Europe the central bank is lending to its banks at negative 1 per cent, but it is affecting their margins and European bank stocks have fallen sharply. Australia may follow Europe.

In the US, if Joe Biden becomes President he will attempt to flood the country with money and, while that will help the sharemarket, it’s basic earnings that determine value. And right now outside the tech giants there is weakness in American earnings and the COVID-19 infection rate in America and around the world has risen to catastrophic proportions.

The sharemarket has not priced in the risks this infection rate creates for world economies.

Good stocks expensive

But there are some industries that appear to be able to win well in the tough times. The problem for investors is that shares in the companies involved usually have risen sharply in price as buying concentrates in their direction.

So the trick is to find recovery stocks that the market has missed. Some months ago Nucleus invested some of its spare cash in the safety of international pet food and pet stocks as a defensive measure.

As it turned out, they boomed. Homeware and home repair companies around the world have done well and, like healthcare stocks, have been strongly supported leading to much higher share prices.

More recently there’s been a rush to buy new and used cars because people are too scared to use public transport or are working remotely and need additional family cars.

Our market is strongly represented by bank stocks. Our largest company, CSL, is an excellent operation but is priced way above equivalent pharmaceutical companies on the world stage.

For Australia, the key will be China and whether we can resume the close relationship. That is now looking increasingly doubtful so our education and tourist industries will be impacted as will many export industries. And the Chinese economy itself may take longer to recover to its former levels, which curbs the outlook for miners. The deterioration in China-US relations is unlikely to change direction if Joe Biden wins next week

So Nucleus remains liquid but looks for stocks but will perform well in a COVID world but have not been boosted in price. That will comfort those that are overly liquid and suffering from the low interest rates.