If the Covid-19 crash of 2020 turned out to be a good time to buy shares, then we must ask: is the 10 per cent-plus correction in January 2022 offering a similar opportunity?
The short answer is yes.
This is far from scary – the 10.4 per cent decline that has taken five months to reach the point of a technical correction should not disturb consensus estimates that shares will continue to offer double-digit returns in the calendar year ahead.
The extraordinary period of central banks propping up sharemarkets with easy money had to end. It’s going to mean trouble for some stocks, but it is not going to be trouble for long-term investors in the best companies, especially those that have been undervalued in the recent rush for “growth at all costs”.
Big investment banks, though broadly positive about earnings and share returns in 2022, had been telling clients to expect a 15-20 per cent sell-off this year.
With a very obvious rotation from growth to value about to take off on the ASX, it has taken very little time for market insiders to call this sell-off a buying opportunity. A note from UBS strategist Richard Shellbach suggests the correction “gives investors an opportunity to rebuild positions for the next upswing”. You do not get that sort of comment from market strategists when fear is truly gripping the traders.
The sell-off has been largely triggered by the official arrival of inflation in the economy.
This week’s 3.5 per cent “print” means the major theme of 2021, which held that there was no alternative to risky investments, is going to start changing.
As we wait for a new mantra to come along, a catchphrase from the inflation-ridden 1970s might fill the gap: invest in things too heavy to lift. In other words, hard assets such as commodities, infrastructure, well-managed industrial companies and, yes, residential bricks and mortar, are going to look a lot better in the months ahead.
In fact, the swing to value is already up and running on Wall Street. As Russell Chesler, head of investments and capital markets at VanEck, points out: “Value stocks have outperformed growth stocks by a massive 17 per cent since November last year.”
“In this environment investors should follow a prudent investment strategy focusing on the fundamentals and quality rather than chase the visionary growth companies, many of which are unprofitable,” Chesler says.
“Gone are the days of innovation and ideas as a valuation metric, investors should focus on earnings and good business models based on value and quality.”
Even if this correction deepens in the days ahead, bargain hunters will be looking for beaten-down value stocks. Indeed shares representing good value have long been ignored.
More Coverage
Join the conversation
Growing old with a tax target on your back
Wealthier, older Australians will rightly contribute more to better aged care, but have self-funded retirees got a bigger tax target on their backs?
Read more
Bank interloper that will threaten the dominance of ‘big four’
In Europe, to ‘rev’ money has become as ubiquitous among the under-35s as to ‘google’ information and Revolut, the global neo-bank, is close to getting an Australian bank licence.
Read more