First of all, what is the OECD? It’s an organisation for economic cooperation and development. The group consists of thirty countries that club together, discussing everything ranging from economic to social policies — most of which are macroeconomic related.
Late last year, the OECD reduced their global economic forecast to 3.3% for 2016. It was an increase from 2015; however, it was down from their September predictions by 0.3%. OECD secretary, Angel Gurria, said:
‘Global growth prospects have dimmed again. Since the crisis we have become used to a familiar pattern, springtime optimism followed by downgrades in growth forecasts as the year progresses.’
A big reason for the reduction in forecasts was, of course, because of China. They obviously have ‘significant challenges’ to overcome in the next few years. The rising middle income population, and assets bubbles, are just two of the issue that could affect China’s future. China also has a huge influence on attitudes toward global prosperity.
This morning, the OECD reduced their forecasts again. Projections were cut by 0.3%, with the global economy now expected to grow at 3%. The OECD said economies like Brazil, Germany and the US were all slowing. And, now, these larger developed countries are putting pressure on their emerging counterparts.
Exchange rate volatility was the major concern for these developing nations. Already we have seen China’s yuan waver; other currency could follow if exchange markets remain in flux. But it’s not just currencies.
Stock markets all over the world are dropping, and it’s all because of China’s slowdown. Sure, oil prices have their part to play in the global downturn, but China is on everyone’s minds. And they are especially relevant if you are an Australian business.
Let’s look at some fact we already know to be true. China is our biggest trading partner. Just across the water, we have access to the biggest market for consumer goods and agricultural products. Many Australian companies are cashing in on China’s growing demand. And with stocks being beaten down to rock bottom prices, there’s never been a better time to invest.
Investment opportunities are out there
What’s the one reason why investors lose money? Their emotions get involved. When investing in a company — assuming we’re talking about value investors — you need to be absolutely sure it’s a great business. This means you do not jump onto a company because it looks ‘hot’ at the time.
Once you have bought a stock you believe is undervalued, market volatility shouldn’t change your perceptions. What I mean by this is if you buy into BHP at $14.50 per share, you don’t jump out of that stock when it trends lower. If anything, you should buy more of BHP as you can now get the stock at a cheaper price.
This advice is much easier to give than act on. Of course, it is very difficult to keep your emotions out of investing; it’s your money after all. And, if it you lose it, you have to work longer and harder to get it back.
But that’s why watching the market constantly isn’t want you should be doing. Once you have bought into a stock, and all your stop losses are placed, you should forget about the investment. Not completely forget, mind, but keeping a constant watch of your stock may, amid all the volatility, may keep you awake at night.
Instead you should look for stocks that you hope to invest in for years to come. That way, if your position is down 10%, you can easily reverse your investment time horizon. And a bear market is the best of times to be a value investor.
If you’re familiar with the markets then you will know they are always moving. Equity markets, much like the business cycle, moves in phases. They go up and they go down. Now, in saying this, it doesn’t mean you should buy any old stock and wait for prices to go up.
Great businesses are what you want to look for; otherwise you might as well be investing in an index. In order to beat the market you need to be smart about how you invest your money. Looking at a company’s financials is one way to gauge a successful business. But the business model must also be strong. If you invested in a technology company, whose tech became outdated by an innovative new invention, you might be saying goodbye to your money. That company’s future probably isn’t going to last much longer.
But if you invest in a business that has real world applications for years to come, then you’re halfway to a good investment. The other half is financials. With these two analytical weapons, you’re on your way to being a successful value investor.
Junior Analyst, Money Morning
PS: Value investing is a long term process. But it can make you millions, if not billions, in the long run. Warren Buffett has made his living off investing into great businesses. And you can do the same too. But if you’re new to investing we have just the thing for you to get started.
Money Morning’s Publisher Kris Sayce has written a report all about beaten down blue chips. In his report, ‘Five Beaten–Down Aussie Blue–Chips to Buy Today’, he will show you which blue chips to look at. Kris’s report is a great way to get your first taste for value investing. These companies are great businesses that are titans in their field. But market pessimism has reduced their share price making them an attractive buy.
To get your free copy, click here.