That’s the question investors want to know.
What does a Liberal government mean for Aussie stocks? What does a falling yuan imply? Who will be the winners and losers when this trade war debacle is over?
Judging from the flee to bonds, my guess is that investors have no idea what to do…
Even the Wall Street ‘experts’ can’t agree.
When it comes to the trade war, some analysts think the US index could crash. Others see it surging higher…
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Clearly the ‘experts’ have no idea either.
So, let me clue you in on what I believe is a sensible course of action from here…
You’re using the wrong information…
Rarely do you make lots of money on your initial purchase. Especially in this heady market. More often than not, you pay full price and hope future growth will save you.
I guess that’s why investors want answers. If all the value of an investment is in the future, wouldn’t you want to know what’s coming…
Take the recent Liberal election win. Is ScoMo good for stocks? And if so, which ones?
Here’s the Motley Fool’s best guess…
With a defeated Labor, fears about negative gearing have turned positive. And this could boost ‘stocks tied to residential property market like property website REA Group Limited (ASX: REA) and could even improve sentiment towards property developers like Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP), as well as building materials suppliers like CSR Limited (ASX: CSR), even though the change would not affect newly constructed properties,’ the outlet wrote.
Or what about the trade war? Are tariffs good for certain stocks? And if so, which ones?
In a CNBC interview, US stock advisors liked contrarian names like Ford Motor Company [NYSE:F], United States Steel Corporation [NYSE:X] and O’Reilly Automotive Inc [NASDAQ:ORLY]. Yet their three-minute thesis didn’t sound all that convincing.
Is this really how you should pick stocks? Ignoring earnings, assets and cash flow and guess which names will rise higher on macro themes?
These are businesses after all. Businesses using assets to generate income streams, not gyrating tickers.
Imagine if the ASX closes down tomorrow and all share ownership became private equity. Do your holdings become worthless because you can’t see a daily share price?
Of course not.
But that’s how a lot of investors behave. Most are making best guess bets on stock prices, thinking XYZ outcome will funnel more investors into this or that stock.
What they should be doing is analysing individual businesses on an individual basis.
Understand the stocks you buy. Understand the key factors that influence earnings. Look at competitors. Analyse the industry. Think of what would happen to competitors and your target if the industry grew.
Then, come up with a range of value rather than just piling into names with the hope others will too.
How the macro supports the micro
That’s not to say macro themes can’t colour your views.
Consider the macro view I detailed yesterday…
I proposed that globalisation and trade, particularly for goods, will start heading in reverse.
Productivity, thanks to automation and robotics, is taking workers out of factories. These efficiency gains are becoming widespread throughout the global industry.
What we might end up seeing is a level playing field for all. What I mean by that is costs for producing goods in Australia might be as low as they are in China.
In such a world, where machines do the work, labour costs become redundant. And thus, producers in Australia can compete with those in China.
In this kind of world, it makes no sense to offshore manufacturing. In fact, it becomes cheaper to have factories closer to the market to reduce transportation costs.
What then becomes a point of distinction — and likely profitability — for manufacturers in a post-globalised world is customisation and the ability to tailor goods to their local market.
Now…this view of the world shouldn’t kick off the guessing game. But it can colour the way you look at new investments.
With this view you might want to shy away from auto manufacturers, knowing that few if any have a competitive edge in that industry.
What you might want to look for instead is local service businesses that have built up a dominating market share in that area.
Again, you shouldn’t start guessing from here either. The goal is to find something that’s undervalued absolutely, not relatively. From there, your macro view can give you colour, maybe conviction that the cogs are turning in the right direction.
I guess what I’m trying to say is let the macro view act as supporting evidence of why you believe an investment is worth far more than its price.
Micro trumps macro,
Editor, Money Morning
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