The big bull call: bear market is over August 9, 2012 - 1:20PM Michael Pascoe
The market bears may have run out of puff. Photo: AP
We are at the peak of fear and the peak of short interest in Australian resource stocks.
Risk has never been cheaper and safety never more expensive, there's been a massive bear capitulation in Europe and the re-rating of the Australian dollar and Australian government bonds is a precursor to a re-rating of large cap Australian equities.
In brief, the Australian stock market's five-year bear market ends this month.
Well, that's what self-described resources optimistic Charlie Aitken reckons as the Bell Potter analyst nails his “buy” colours to the wall. Advertisement
With the many bears receiving plenty of coverage with every growl about whatever the latest Armageddon might be, it's refreshing to find a fearless bull prepared to call the Australian market now as sure a bet as Telstra was at $2.60. (The telco stock has since lifted to about $4.)
And Aitken is not entirely alone.
A more cautiously optimistic note from Fidelity Worldwide Investment's global chief investment officer suggests the equities tide is turning “and historically when such a turning point is reached, markets can move ahead strongly”.
'Melt up'
But first, back to Charlie Aitken's big domestic call, one he says he's prepared to be judged on in six and 12 months' time.
The trigger was Friday night's jump on European markets. With just about every global hedge fund short risk, every domestic long-only fund long defensives, private clients and corporations sitting on record cash holdings, “it seems everyone was positioned for the melt down, not the melt up”.
Aitken notes that “for all the corpse-kicking that has gone on in Europe this year”, Germany's DAX bottomed in September and is now up 35 per cent from those lows and France's CAC 40 is up 21 per cent.
But the ASX200 is only 10 per cent above its September low as the index has been held back by the poor performance of resource equities.
“We have the best economic fundamentals in the world and are about to see Australian companies report very solid earnings and full-year dividends,” Aitken wrote to Bell Potter clients at the start of the week.
“I am convinced Australia equities will follow the lead of the AUD and AUD Bonds and play catch up to the world between now and year end…the stars are aligned for the five-year bear market to end as we get confirmation this month about the strength of Australian corporate earnings and sustainable dividends.
“I also believe that Chinese GDP growth rates have bottomed and you at therefore at the bottom in Australian resource stocks.
Risk and safety diverge
Aitken goes on:
“In my career I have never seen such divergence between risk and safety. Risk has never been cheaper and safety never more expensive. Quite frankly there is a bubble in safety (negative short-term bond yields).
He even sees politics as an opportunity:
“I think the fundamentals (macro and micro) and technicals are aligned. I also think, importantly, that the domestic equity market will turn in anticipation of a change of Federal Government. I want to be well ahead of that important sentiment and confidence event.”
The next Australian election doesn't seem to make it onto Dominic Rossi watch list at Fidelity, and he is not given to Charlie Aitken's enthusiasm. But he's also game to suspect a turning tide:
“The uncertainty associated with the eurozone crisis has weighed heavily on stock markets. Investors have poured into the safe havens of fixed income, pushing yields on US and German bonds to record lows. Yet, as time has progressed and doomsday scenarios have been avoided, equity markets have switched out of panic mode and grown accustomed to the possibility of a Greek default and Spanish and Italian bailouts.
“In my view, these risks are now largely factored into valuations," Rossi says. "While the crisis is by no means over yet, there are more reasons to be cautiously optimistic.
Rossi sums it up this way:
“I think the time has come to stop thinking about selling equities and to start thinking about buying them.”
Sentiment shift?
That's a long way short of Aitken putting his foot to the floor, but it could reflect the change in global market sentiment last week.
None of it will convince the more committed bear commentators who have the momentum of recent years on their side. It's a strong force - until the day it changes.
Aitken's case rests on a solid Australian reporting season and the slowing of China's growth rate having bottomed out. We find out about the former throughout this month and get an important first reading of the later this afternoon.
This column is not intended as investment advice.
Michael Pascoe is a BusinessDay contributing editor.
