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With the Australian market up nearly 10% in just seven sessions, investors are wondering whether this market can hold on to these recent gains. At these levels, many stocks are approaching near-term resistance and as any seasoned trader knows, markets never move in a straight line.
It is likely markets will retreat from current levels, giving back at least a few percentage points from this most recent hot-headed rush back to risk assets. The issues plaguing global markets still remain but traders and investors have extremely short-term memories. It seems that during the recent lows, markets were beginning to factor in the diabolical global economic and political situations. The European banking system remains under question, but quality companies represent undeniable value.
For long-term investors, now is the time to be adding risk to a quality portfolio of highly-profitable companies. We may still see the ASX 200 head lower and the chance of re-testing recent levels remains a possibility but anywhere below 4,000 represents excellent long-term value and is a level that could well be viewed as a historical milestone.
Technically, a number of factors tend to agree:
The ASX 200 tested the 3,900 support level on seven separate occasions in recent months but only closed below this level twice. Support is evident as the market appears ‘cheap’ against historical values. Stock holders will not want to discard portfolios at this level and risk selling at the bottom. When markets were heading south, On Balance Volume was offering a very compelling divergence. Large scale buying is evident at current levels as fund managers don’t want to miss the chance to improve on recent slim investment portfolio returns.
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Anyone assessing their current portfolio of long-term income stocks may benefit from ignoring the current tsunami of media attention, which has very little to do with Australian company performance. The questions we need to ask are: “What has changed?” and “Do the companies I own still represent long-term value?” If the answer to the first question is “not a lot” and to the second “yes”, then now could be the time to add to that long-term nest egg.
Australia has an abundance of cashed-up companies with large-scale projects on track to satisfy continued global demand. Those analysts warning of a slowing demand out of China, an implosion of the mining industry and an historic oversupply of iron ore and coal, should be asked what Australian supply figures they have been looking at.
Chinese GDP growth estimates remains at 9.5% compared to a global expectation of 3.5%, Australia’s largest miners all reported near-record exports at astonishingly high commodities prices and forecasts remain buoyant into the second half of 2011.
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Source: Rio Tinto
Sure, commodities prices may retreat from current levels and matching 2011 first-half earnings may prove difficult but current export fundamentals do not reflect a global depression as much of the mainstream media is suggesting. In fact, the reality is quite the opposite. The developed world is experiencing a colossal shuffle. As the once mighty US flounders in the face of a surging China, we continue to see a transfer of wealth from West to East. Many Australian companies are favourably exposed to this shift.
Good quality companies are on sale now. A number of quality Australian stocks represent long-term value and are currently trading well below their historical highs. Many of these companies are exposed to continued growth out of China, yet investors have fled to safe-haven assets in the face of a partially un-related US and European melt-downs.
All Bets On...: Woodside Petroleum. With astronomical investment in Liquefied Natural Gas infrastructure, Woodside remains the number one bet for LNG as they move to full production in coming years. Leading the $27-billion Northwest Shelf LNG project, Woodside is set to not only be a leader in global LNG infrastructure and development, but also has its own large-scale projects. Woodside is on-track to be among the first major Australian LNG producers to bring large-scale LNG exports to Asia and beyond. Aside from a few time delays and minor financial set-backs, the company is largely meeting its financial and infrastructure targets.
Looking at a daily chart, today’s pricing represents an opportunity to pick-up shares at a similar market discount to post-GFC prices. The difference today is that the risks to production by Woodside’s flagship assets are much lower as 15-year sales contracts are in place and first production is just around the corner.
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Woodside Petroleum’s growing asset base is likely to supply energy to the world for generations to come. Our children may one day reflect on the financial woes of 2011 when their parents had the opportunity to buy into this and myriad other high quality companies at once-in-a-generation prices.
While this may seem a rather contrarian view to the constant mass-media drone of financial oblivion, now may just be the time to place your bets and add to that long-term holding of high quality Australian companies.
Keep an eye on our Trading Tutors blog and see next week’s Trading Tutors Newsletter as we explore further opportunities across a range of quality Australian companies.
Stay ahead of the game,
Lachlan McPherson
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