Why You Should Buy This Falling Stock Market

Market up. Market down. Market sideways.

As Murray Dawes has been keen to warn you, the Australian stock market is at a key level.

Call it an inflection point if you like.

Based on Murray’s technical analysis, the stock market could either collapse or soar. Although he says the biggest risk is for a collapse.

It’s why he has positioned his traders to profit by short-selling a number of stocks.
But there’s more than one opportunity to profit from a falling market

In Monday’s Money Morning we explained that a new game was on in the Australian stock market.

The balance had shifted from dividend stocks to growth stocks.

That’s not to say you shouldn’t buy dividend stocks, because you should. In fact, with the market now trading at the low point of what we believe will be a year-long sideways trend, topping up on dividend stocks makes sense.

We just don’t want you to think you’ll get the 20% or 30% gains that dividend stocks gave you over the past six months.

Here’s a chart of the S&P/ASX 200 that shows what we mean about a sideways trend:


Source: CMC Markets Stockbroking

We’re convinced this trend will tie down the Australian market for most of this year. Record low Australian interest rates will keep forcing investors to buy shares for income.

A Small Change Can Make a Big Difference to the Stock Market
But it’s not just Australian interest rates. This outcome also relies on US, European, UK and Japanese interest rates staying low too. Low interest rates in their domestic economies will keep up demand for high yielding Australian stocks.

And so over the next year you’ll see buyers step in and buy specific stocks if share dividend yields rise too high. Here’s an example using a popular Australian stock, AMP Ltd [ASX: AMP]:


Source: CMC Markets Stockbroking

It may not seem like it, but there’s a big difference between a 4.47% yield and a 4.93% yield. On a $500,000 portfolio, it’s a difference of $2,300 in income each year.

But you don’t want to overpay. After all, you can get close to 4% on a bank or term deposit, with supposedly no risk. Contrast that to the risk of capital loss with shares.

This is exactly why, providing central banks don’t raise interest rates (which doesn’t seem likely at the moment), you’ll see a yield-driven market for most of this year.

Of course, the stock market isn’t all about yield. In fact, of the 2,000 ASX-listed stocks, only a quarter of them pay a dividend. And about half of those are more growth stocks than income stocks.

We see falling stocks as an opportunity rather than a threat. Most investors don’t just want income, they want growth too. And if we’re right about the next 12 months, you won’t get much growth from dividend stocks.

Put These Unloved Assets Back on Your Buy List

That’s why we’re betting on growth stocks to make a comeback. Note that we’re not saying growth stocks will find favour straight away or within the next few weeks.

We are saying that over the next 12 months value and growth investors will start searching for beaten-down and undervalued stocks. Most of these will be the growth stocks that most investors have ignored for nearly two years.

As you may know, for most of the past two years we’ve suggested you stay away from blue-chip growth stocks. They weren’t the safe-as-houses stocks they used to be.

But with many growth stocks taking a beating in recent months and our forecast that investors will switch from dividend to growth, it now makes sense to put blue-chip and small-cap growth stocks back on your radar.

How much should you invest? That’s your choice. You should invest whatever amount is comfortable to you.

But know this: it’s still a risky strategy. Anytime you try to take a contrarian position on the market you’re always at risk of getting the timing wrong.

That’s why we don’t suggest you pile into growth stocks with every penny you’ve got. Instead, because it could take many months for this set-up to play out, we suggest buying into growth stocks gradually over the next few months.

In short, it’s wrong to always view a falling market as an opportunity to sell. You should think about why the market is falling and try to find the opportunities to buy.


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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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