Home / Some soothing words about share market noise

Dennison Hambling 
With the Australian share market set to have its worst month since October 2008 at the height of the GFC and the total global market officially in a bear market, being off more than 20 per cent from its peak, one fund manager has provided some soothing advice. Don’t worry about the market, worry about your own portfolio.
Dennison Hambling, First Samuel chief investment officer, told clients last week that markets tend to react to emotions in the short term, over-shooting and under-shooting. And the chance of picking the direction of the market on any given day is 50/50. But if you are trying to predict that every day, the chances of success fall dramatically, no matter how much skill you have. For instance, if it’s a 50/50 call on any day, then the chances of getting that right for five consecutive days is just 3.1 per cent.
Hambling says: “Notwithstanding the poor odds of being successfully right in the short-to-medium term it does not stop the media and most in this profession from telling us that the share market is telling us what is going on in the world… The share market doesn’t tell us what is going on in companies. It doesn’t tell us, day to day, about the value of a company. Does anyone really think that the value of CBA has fallen by 20 per cent in the last six months?”
First Samuel’s take on what is really going on is that the poor market start this year reflects a dam-burst of emotion from a pent-up release of sombre economic facts, overlain on an over-valued market. If the share market (especially the US) had not been over-valued (i.e. trading on a P/E well above its long-term average) then any or all of the following would have had little impact:

• Rising US interest rates (less loose money sloshing around the rest of the world);
• A slowing industrial China (but burgeoning service sector); and
• More oil currently being produced than can be used, at almost any price.

Hambling says: “Resource prices, driven sharply lower by slowing industrial China, (actually the price of iron ore peaked in February 2011!) and the oil price (which most recently peaked 18 months ago) in particular have had a large impact on investor sentiment. Does this mean, however, that these sectors are goners and destined to be so forever? Is this new news? Of course not.
“It is natural for commodity prices to fall after a boom, there is now too much of most things being produced for what is currently required.  This means that the high cost producers will face closure (like Mr Palmer’s nickel operations) and the markets will rebalance in time.  The low cost producers will still be able to make money (or at least not lose much for long) and when the rebalancing has concluded the market will be much sounder.
“We see this process as being well underway.  Oil in particular will begin to see market volume declines later this year as virtually all of the US oil shale industry is now unprofitable at these prices.  With no cheap money being lent to it, defaults will pick up and the market will re-balance.
“For other commodities it will take more time, as the supply is substantial and demand may well fall for a number of years (for example for iron ore – given a declining industrial China).  There will still be some producers who make money, but the windfall gains of the past 10 years are gone.  Iron ore (and coal) will largely be a cost plus business now for those with low cost operations, for some time.”
The manager therefore sees the current climate as a buying opportunity and has been cautiously increasing clients’ exposures to resources.