For those not burdened by numerical suspicions, and for investors with some knowledge of behavioural finance, the dance around the S&P/ASX 200 benchmark hitting 5000 can be a profitable one
Photo: Louie Douvis
The number 5000 is on the minds of many Australian equity investors, as the S&P/ASX 200 benchmark flirts once again with the level it has not broken above since mid-2009 (we’re not counting its day trip over the 5000 barrier in April 2010).
Yet for those not burdened by numerical suspicions, and for investors with some knowledge of the behavioural finance factors involved, the dance around 5000 can be a profitable one.
The rally that has brought this issue into focus is part of a global trend. Punters around the world are reconsidering shares after spending an extended period cowering in the perceived safety of cash and bonds.
Fund flow tracker EPFR Global has just recorded a seventh straight week of United States equity funds attracting ”inflows” while their bond counterparts suffer “outflows” – breaking a long drought for shares, which has seen $US600 billion ($576 billion) pulled from share funds and $US800 billion directed into bond funds over the past seven years.
However Australian investors face a numerical barrier which is not troubling their cousins in America, where the S&P 500 equity benchmark has been trading in the late 1400s to early 1500s.
Doesn’t have quite the same pyschological power as 5000, does it?
Some in the financial markets have even invented a name for the mystical pull that big round numbers can have on investors.
“You hear it called ‘roundophobia’, and it really does have an impact,” AMP Capital Investors chief economist Shane Oliver says. Oliver also makes asset allocation decisions for the big fund manager’s sizeable pots of superannuation money.
There is a sufficient number of people for whom round numbers represent a signal – most often to take profits by selling down their holdings – that it becomes a “technical barrier” for the share market, Oliver says.
“It was an issue during the rally we saw between 2003 and 2007, when the market would regularly push through these big numbers, and then you’d see a pause. The round number becomes a point of resistance.”
This time around, the “pause” or even fall in share prices could be more severe if the S&P/ASX 200 gets to 5000, Oliver says, because the two unsuccessful “attempts” to break through it in 2010 and 2011 may mean there are more pent-up sellers around.
This is one scenario entertained by Donald Williams, the head of Australian equities investor Platypus Asset Management, who points out that the march towards 5000 has not been built on any evidence of earnings growth for Australia’s listed companies.
He says the earnings reporting season throughout February will have little hope of living up to the hype implied by the rally on the S&P/ASX 200, and would not be surprised to see it retreat to as little as 4200.
Savvy investors could use the 5000 barrier not as a signal to sell or buy, but wait for it to help cause such a market dip, and then buy in to stocks more cheaply, Oliver says.
Although if they believe in a company’s fundamental worth, they should not even wait that long Montgomery Investment Management founder and principal, Roger Montgomery, says.
He says the build-up of “the 5000 mark” as a “pyschologically important” milestone has mostly been the work of market commentators, and is best ignored by ordinary retail investors.
“It is a fool’s game to try and ‘time’ the market with your investments, as there is no way of forecasting or controlling where the sharemarket will go, and waiting on the sidelines until a ‘pyschologically important’ milestone is reached can result in a lost opportunity to invest in quality companies at attractive prices,” he says.
5000 not the only big number
There are other indicators apart from 5000 that are more important to Russell Investments global head of investment strategy Andrew Pease.
He has his eye on the VIX Index, a measure of global sharemarket volatility, which during the last week of January fell to a five-and-a-half year low of less than 13.
Another one he watches is Citi’s Economic Surprise Index, which measures where United States economic data is hitting, compared to the consensus forecasts of economists.
“Two months ago that was very positive – the data was exceeding the forecasts – but now everyone’s ratcheted up their forecasts and the data is starting to disappoint,” he explains.
“Taken together, the VIX and the Economic Surprises Index are signs of complacency that the market is starting to become over confident,” says Pease, who helps oversee Russell’s $US150 billion under management worldwide.
Russell’s house view is that ‘fair value’ for the S&P/ASX 200 is around 4800 (it was approximately 4900 as this article went to press).
However those fixated on 5000 intrigue are missing the bigger picture, Pease says: the question of whether the market is still trapped in the “risk-on, risk-off yo-yo” that has kept it range-bound for the last four years, or whether it has escaped and is now enjoying a “great rotation” from bonds into shares.
The aforementioned EPFR fund flow figures arguably suggest a “great rotation” is on, but Pease would remind investors to also consider the “January effect” – the historic tendency for equity fund coffers to grow every January during a flush of new year optimism.
Even if the S&P/ASX 200 does break 5000, Pease would be cautious about calling a bull market, where those gains could expect to be sustained.
Apart from the lack of earnings growth about to be unveiled during the local earnings reporting season, Pease says a couple of global events could send nervous investors scurrying and the market retreating back below 5000 again.
“On March 1 you’ve got the sequester in the US (the advent of spending cuts of 7 per cent for the Pentagon and 5 per cent for domestic programs), the effect of which has been completely understated,” he says.
The cuts were meant as a “poison pill” during the original US debt ceiling negotiations of 2011. However, Pease says there is growing resignation among Republicans and Democrats in Washington that the cuts – an automatic 2.25 per cent hit to gross domestic product – will proceed as a “path of least resistance”.
One wonders when the US equity bulls will get the message - they obvisouly had not when sending the Dow Jones industrial average through 14,000 early this month.
The elections factor
There is also a national election due in Italy during February, “which will refocus attention on everything that’s wrong with Europe”, Pease says.
That’s not to mention the calling of a September election much closer to home – if not very close at all in terms of time – which could be another blow to those with hopes of the market powering through 5000.
“Markets are historically sidelined in the run-up to an Australian election, but usually the date is announced only six weeks in advance,” AMP Capital’s Oliver says.
“[Prime Minister Julia Gillard’s early announcement of a September 14 poll] is certainly not a good thing for the sharemarket. Retailers will tell you that in an election campaign, consumers are more reluctant to open their wallets.”