Business & Finance Investing & Financial Markets

Greek Tragedy Or Just A Thriller?

Good evening,

As often happens in times of increased volatility we have been fielding an increasing number of phone calls and emails relating to recent moves in the share market. Specifically, clients have been asking whether we think the market will continue to fall, and if so whether they should buy some put option protection. From experience if one person asks, almost everyone else is thinking it.

We thought it prudent to relate a story to you about our experiences eighteen months ago as illustrative of what happens in highly volatile, down trending markets. Not many of you will know this but in the previous bear market almost one in every two of our clients exited the market entirely. It did not happen as the market was falling, but happened almost entirely when the ASX200 was trading below 3800 points, actually within very close proximity to what we now know to be the bottom of the market.

The reason markets fall very quickly, in the most basic sense, is that there is an oversupply of stock for sale over and above the number of people willing to buy it. There is less value in absolute dollar terms, if you will, on the bid (buyers) than on the offer (sellers).

Unfortunately, falling markets draw more sellers out because of the fear of the unknown, not knowing how far the market will continue lower. We want to caution against allowing fear to rule your decision making process.

A lot more is known today about the state of the global economy now than was known 18 months ago. We have included what we see as the key 'knowns' about the situation below.

So let's boil this down to raw facts and valuations to build an argument for or against the market falling below, let's say, 4000 points.

1. The last time the market fell below 4,000 the world was in the grip of a synchronised global slowdown caused by frozen credit markets and a global private sector de-leveraging. This time, however, Europe is the only area still stagnant and the PIIGS (Portugal, Italy, Ireland, Greece and Spain) are currently the focus of the worlds attention, particularly of course Greece. The USA is gaining traction and Australia has been well insulated through its association with the still strong Chinese economy. In fact, China is now growing at 12% per annum and the Government is trying to rein this back to 9% to ensure inflation doesn't get out of control.
I think that we can all agree we're playing on a better wicket in 2010 over 2008. Yes there are headwinds and challenges facing the global recovery, but things have certainly improved.

2. Greece. Basket case. But let's put this in perspective: Greece is a country of just 11 Million people versus a Wiki Estimate of 830.4M people living across Europe. The real fear here is not of a Greek debt default but of 'contagion' - the fear of the Greek situation infecting the Government credit markets of other European countries. It's not that the others are as close to a debt default as Greece was before the bailout, but rather that financial market participants might be disinclined to purchase debt guaranteed by other debtor nations. The jury is still out (ie Greece has not defaulted yet), but one thing is certain: The market's actions to date have been based more on fear and uncertainty than any reality. To fall significantly from here the situation in Europe would need to deteriorate significantly from its present state

3. The valuations of Australian equities are, at 4300 points, representing absolute value. The idea behind investing is to buy low and sell high, and buying the domestic market at these levels clearly represents far greater value than a month ago. Valuations are going to support our market below certain levels just as we saw today: the ASX200 was -140 points on the open and closed just -11. This reversal doesn't mean markets will suddenly return to more normal levels of volatility, but it does illustrate that there are plenty of investors willing to step up and buy stocks at the right price, when true value is present.

Based on these views we purchased two additional positions making the portfolios now fully invested, 10% of the portfolio was allocated to each position as follows:

Asciano - AIO - $1.50. For those of you unfamiliar with the stock, AIO is the largest Port and Rail owner and operator in Australia with assets including Pacific National Rail and Patrick's Ports. Both businesses are trading extremely well, and considering the assets are irreplaceable and monopoly in style, we are very happy to own them at the right price. Around a year ago we bought our first position in AIO, around $1.32 per share. The shares have traded as high as $1.90 since then, and we sold out of the position at an 18% profit on the investment. AIO is worth every part of $1.90 however today we paid just $1.50, the shares closing out the day at $1.55.

General Property Trust - GPT - $2.60. GPT recently underwent a capital reconstruction for 5 to 1 of its shares. The recent trading range was equivalent of $2.75 to $3.10 however recent price weakness has the stock trading at a 22% discount to NTA (net tangible assets). GPT exclusively owns blue chip property assets in Australia, pays a dividend of 7% unfranked, however they pay out only 80% of revenue, meaning the real earnings are around 8.4% of the share price. Gearing is now at a very conservative 20%, building occupancy is at 99% and the average lease expiry period is one of the longest in the industry. GPT has been on our wish list for months, and today we paid the equivalent price it was trading for in July last year when the index was at 4000.

As we wrote to you at the end of April (when the portfolio was fully liquidated, something your average managed funds can't do), we perceived the risks in the market to be to the downside.

After a 500 point fall, we see the downside as being significantly reduced, with real value being presented across the market. We are very happy with the quality of all positions and our entry prices. We may not have picked the bottom in some of them but we expect to do very well out of our current holdings.

As always; and particularly in these times of heightened volatility if you have any questions or would like to discuss your portfolios we would welcome your call.

Talk soon,

Shawn Uldridge and Hayden Kerr.
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