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Fear Rears Up — Is Now the Time to Buy?

The fear is usually worse than the actual event.

I remember being on holiday in France when the North Korea v. US tensions escalated. It was August 2017. And Trump made an unusual and unscripted remark: ‘They will be met with fire and fury like the world has never seen…’

By then, I’d been living in Europe for some time.

And it seemed, as those so true words in Hamlet put it, ‘When sorrows come, they come not single spies, but in battalions.’

What Claudius meant was that ‘when bad incidents occur, they do not happen alone and many other bad happenings occur simultaneously to contribute to human tragedy.’

The markets took a turn for the worse on the unimaginable threat of a nuclear conflict with North Korea. There was wide sell-off. Investors hunkered down.

I was invested in the markets and working in the industry. For me, it was a dark few days. I wondered if a crash would come.

Meanwhile, I was battling serious building issues in our apartment complex. Homesickness that seemed to hit me years later. And children very unhappy in the suffocating environment of British schooling.

Certainly, if North Korea was to start sending missiles toward the US, your family is far better to be residing back in New Zealand.

All this was running through my mind as my stocks plummeted, forex continued to decline (against the NZD), my apartment looked unsaleable, and the prospect of returning to school after the term break filled my 6-year-old daughter’s eyes with tears.

In contrast, the Brittany countryside surrounding our ancient chambre d’hote was calm. But as I logged into my trading desk, moving around the room to try and get internet beyond the 3-foot thick cement walls, the screen showed a dark sea of red.

Lojis De La Pervota, Northern France. Peaceful surrounds belie turmoil. Source: Booking.com

It was not until sometime later that the prospect of more hefty market losses was averted. US Secretary of State Rex Tillerson announced there was ‘no imminent threat of war’ and that Americans could ‘sleep well at night’…

Well, we seem to have had a dose of the fear sentiment in the last week. In fact, I was worried we were about to see the start of a major downturn.

An army of news pointed to a disturbing global slowdown and spooked investors. Manufacturing surveys were worrying not only Europe, but the United States as well, with the worst reading in a decade.

Of course, investors saw this as part of a wider systemic malaise. That the global economy is not equipped to deal with the level of fallout and required readjustment the current trade war threatens.

When the threat turns to hard numbers, this leads to fear and a sell-off. (Although this can be overdone — particularly when numbers come from surveys rather than ‘hard’ figures like sales).

Meanwhile, continued opposition to Boris Johnson’s Brexit deal saw FTSE stocks stumble.

Reports in the British media last night suggest talks are close to breaking down and the Northern Ireland border issue cannot be resolved. The pound has fallen, as have domestically focused stocks. Expect further volatility and look for opportune dips.

In the US market, some fear was lifted when actual US job numbers came in positive.

The unemployment rate fell to a 50-year low of 3.5% as non-farm payrolls rose by 136,000 in September.

Although this was slightly below expectation, it warmed investors. Because ‘below expectation’ could add fuel to Trump’s latest fire — that the Fed ought to cut interest rates.

Some fear dissipates. The markets are up again. And the analysts at J.P. Morgan are now suggesting that any correction is now ‘half over’.

During times of fear and correction — that could be the time to hold your nerve and buy.

While we’re still waiting to see on geopolitical events, there remain patches of value. So we’re altering our ‘Buy Up To’ recommendations. And for now, we’re suggesting some forex acquisition in preparation.

For more info on trading currency pairs, please view this previous post (when logged in).

Portfolio update

The share price for General Motors [NYSE:GM] has taken among the heaviest hits in our portfolio.

As investors fear a trade war, the addition of a major strike involving 46,000 workers has put the troubles surrounding this company not as single spies, but as Claudius said, whole battalions!

As we mentioned last week, there is considerable risk in buying GM right now.

The USD is high.

The previous GM price assumed the strikes would resolve relatively quickly.

Logically, the strikes should resolve soon. The union workers earn only $250 a week while they’re on strike. A sum that doesn’t come close to replacing their wages.

There’s only so long they’ll hold out — surely?

Unfortunately, the latest announcement on Sunday in the form of a letter to members from UAW (United Auto Workers) VP Terry Dittes says that talks have ‘taken a turn for the worse.’

In other words: the much-anticipated counteroffer from GM has been inadequate.

With the strike continuing, the company loses $50 to $100 million in lost production per day, according to estimates by J.P. Morgan.

As this starts to impact earnings, the stock price could fall further. But it could also be overdone, as the company has inventory of forward stock at dealerships.

The remaining strike issues seem to be around healthcare and a pathway for temporary workers to become permanent employees.

Again, resolution could lead to decent upswing. Time to buy?

There remains the risk that the strike will drag on and damage the business in the short-run. Yet the current share price reflects value. And for now — an attractive dividend yield.

And if you’re looking at the much longer term, GM could be well-positioned for massive growth (and acceptance) in the self-drive industry, electrification and in alternative fuel.

NewRiver REIT [LSE:NRR] and Crest Nicholson Holdings [LSE:CRST] show signs of Brexit drift and fear. Crest is down quite sharply from the previous confidence.

Yet NewRiver is holding value. At the current price, it is starting to look like it has some defensive prospects with its ‘convenience and community’ retail focus.

The concern now — following the EU’s rejection of Boris Johnson’s initial proposal — is that the prospect of a no-deal exit is more likely. Hits to the UK economy could get ugly.

And Remainers are ramping up, trying to thwart what Boris is fighting for: the Leave vote selected by 52% of the British public.

You will no doubt have your own convictions on how Britain will leave the EU. Nothing yet is certain. Could the pound drift lower? Could the FTSE be in for a major shock?

My own view is that there is sufficient value available right now to shelter from the worst of the storm over the longer term. And the savvy will buy the dips, troughs and shocks.

Tassal Group [ASX:TGR] continues to drift lower. It’s first in line when it comes to trade fears and climate-change worries. Yet the company has an exemplary record of growing earnings and is pushing on with investments into new hatcheries and operations.

The recent share-purchase plan raised AUD $108 million to increase shrimp production.

Despite the strong record in earnings growth and increasing demand for salmon and seafood, investors seem to be taking a wary approach. Can Tassal successfully capitalise on demand when the global outlook is weighed down with trade war fear?

Also, the targeted rise in shrimp growth departs somewhat from their mainstay business of salmon farming.

Yet insiders — directors — have been buying shares in decent quantities. Again, the long-run outlook of the business appears promising.

Westpac [ASX:WBC] share price has also slowed since the Reserve Bank of Australia cut the Official Cash Rate to 0.75%. The bank has already announced some reductions to home-loan rates. There are signs that margins — and in time, the generous dividend — could come under pressure.

Risks remain around the Australian property market and increased regulatory pressure on the banking industry.

Yet there are signs that the property market in Australia is about to improve. Lower rates will help. For Westpac, beyond negative short-term issues, this is a solid business that demonstrates excellent return on equity. It is very strong in loan markets. We see enough earnings growth potential to continue buying around the current share price when opportunity presents.

AUD.NZD, AUD.USD

We had hoped, with the cut to the Australian OCR, there would be some weakness to buy AUD.

To date, softness has only been slight as other signs suggest the property market is about to enter a recovery mode.

Yet we’re not convinced. The Australian economy is linked to China. Should the property market recovery fail to eventuate, room to cut interest rates further is fast diminishing. If the China-focused trade war takes a turn for the worse, then AUD could really soften.

OCBC Bank [SGC:O39] is one stock that sits quite soft for now. It has just paid its dividend, so some investors may choose to exit. With expansion into emerging markets, there is fear that the risk profile is increasing amidst an uncertain economic outlook. Yet dividend has increased and the stock price shows some value.

Please see our current portfolio below and the new ‘Buy Up To’ guidelines:

 Current as of 9 October 2019 at 8:30pm GMT.

As you’ll have noted, we’re watching and waiting for signs of value and opportunity. Our strategy is both macro and value focused.

We need to embrace a little fear to make the ride worthwhile. Even when those fears come in battalions across the world market.

Buy the dip. Get some income while you wait for the lift. And use market fear to your advantage, not detriment.

Fortune favours the bold.

Regards,

Simon Angelo

Editor, Lifetime Wealth Investor