Today marks a new start, a new financial year, providing an opportunity for everyone to reset their goals and game plan for the new financial year. As good a place as any to start is where do we see the hotspots for trading this year? Our Market Predictions June 2013 Financial Year
Market Predictions June 2013
Yield is everything!
Stocks offering yield have come back a long way over the past 3 months. Telstra, ANZ, Westpac Bank being three examples where prices have declined post dividend. Higher yielding stocks that are continuing to offer a level of earnings stability will return to the fore, in the run up to the next dividend season and we are poised to take advantage of that.
What is driving this?
With interest rates at historically low levels, bond yields also running lower, making the traditional areas for yield investment far less attractive. This is not simply because of the relatively low yield, but also because after inflation, real returns are now “paper thin”.
Instead, investors are going to have to look into alternative areas for generating returns. Higher yielding stocks represent a great alternative provided the business is robust and has a stability of earning. So where else can investor seek yield?
Well a more regular way of generating income, beyond that offered by dividends is through covered calls. The income is up front and immediate, presenting a great opportunity. In other words you are not holding the stock for several months in order to receive the dividend and pre-dividend run up in the stock price.
By not needing to hold the stock for a long period of time, effectively can help reduce market risk ie instead of being in the market for a long period of time, we can be in an out, reducing our overall exposure to risk, yet still generate a yield.
What about Gold?
Gold right now really has struggled to find a friend. The key issues behind the fall in price can really be attributed to the economic backdrop. During times of uncertainty, historically investors have looked to gold as a safe haven. This appears not to be the case right now, but why?
Holding gold effectively means being long the US dollar. This is not appealing for many investors, given their view on the US economy and the possible currency moves based around that.
Gold is traditionally used as an inflation hedge. Looking around the world at the major economies, there really is no inflation – as such no “inflation hedge” case for holding gold.
When entering into a position on gold, there are holding costs, and no yield to offset these. This means cash is tied up – without a move up in price, the investor is making nothing. In fact there is an opportunity cost of earning nothing on those funds. With shares, the investor will receive a dividend or call premium if they sell options over their stock.
With a slower global economy, industrial demand for gold is also likely to be running a slower levels, again providing a less than supportive environment for gold’s price.
Ok so where is the money going to go?
Given this backdrop and the start of a new financial year, money will have to go somewhere, and higher yielding blue chip shares would be likely beneficiaries. This would sit well within our strategy, enabling us to target call writing opportunities and calendar spreads.
Are there further factors to be mindful of?
The election is the big wild card for the market. With the recent departure of the Gillard team and the resurrection of the Rudd camp, what would have been a one horse race is now back open for contest. The recent bounce in Labour’s primary vote reflects the level of dissatisfaction that was sitting with the electorate and the Rudd campaign has kicked off in earnest. A Labour win, would almost certainly be a significant negative for the equity market.
So what contingency plans are in place?
Chances are as we approach the election, and depending on how the polls look, there could be some local volatility. Markets generally dislike uncertainty and so to sidestep this issue, we have a vast range of opportunity open to us in the US market. We have been increasing our activity levels in the US market over the past 6 months and would invite you to do the same. Using our TWS service, you can enjoy the benefits of extremely low cost brokerage and the opportunity afforded by the US equity market. What’s more, by using covered calls and calendar spreads on Exchange Traded Funds as well as stocks, your ability to isolate opportunity and capitalise on it, has never been easier.
This is a new start today – a new financial year and a new screen of opportunity – happy new year and enjoy it!