Beware when trawling for share bargains
By Erica Thompson January 21, 2008 09:20am
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WHEN shopping for bargains in a sinking market make sure you only pick the best of the bunch, analysts say.
World sharemarkets have dropped significantly from their peaks of the past few months as fears of a US recession rattle even the most optimistic of economists.
On Friday, Australia's All Ordinaries Index suffered its 10th straight fall and is on the verge of recording an annual decline for the first time in more than four years, according to CommSec senior equities analyst Craig James.
He says the valuations of some of our biggest listed companies are now trading near 17-year lows with many stocks, including the major banks, being oversold by panicked investors.
So is now the time to buy?
Dale Gillham from boutique funds manager Wealth Within says while market corrections do provide the best opportunities - people who bought QBE insurance shares after they halved in value following the September 11, 2001, terror attacks in the US, for instance, would have seen their holding rise 500 per cent - investors should still be picky.
"If you are going to get in now, go for good-quality shares in the top 10 or top 20. Stay away from the more speculative and lower-cap stocks,'' he says, adding the global credit situation is still far too volatile to even consider borrowing large amounts to invest in shares.
"It's not the right time to (gear) . . . there's possibly another 10 per cent in this fall and then the market will just be sensational (for buying),'' he says.
Paul Zwi, head of equity research at Centric Wealth, agrees investors should exercise caution and steer clear of low-hanging fruit.
"This strategy means that we will likely miss some great money-making opportunities but hopefully and, more importantly, we . . . avoid any real disasters,'' he says. ``There are risks in the market and it's OK to hold higher than normal cash levels.''
He says the best approach for people wanting to increase their holdings during periods of weakness is to average in and buy ``high-quality blue chips with a three-to-five-year view''.
"Most bear markets have lasted for a year or two so provided investors have an appropriate time horizon they should do well.''
He says it's important to "avoid speculative stocks, very highly leveraged stocks, overly complex stocks that you don't understand well enough and don't be seduced by high yields which may prove to be unsustainable''.
Mr Gillham says sticking to quality rather than quantity is also a good defensive play in uncertain times.
"If you invested $1000 in each of the top 10 shares in 2007, your capital gain would have been $2525.99 or 25.26 per cent plus an average 3.94 per cent dividend,'' he says.
"So if all you did was buy and hold the top 10 shares last year you would have beaten the market, whereas most people . . . went into negative territory with their portfolios.''
In the past decade, the top 10 shares have produced eight winning years and two losing ones, Mr Gillham says.
"So historically there is good reason to employ this strategy.''
While analysts are divided on just how long the downturn will continue, Mr Zwi says it never makes sense to try and time the market.
"Don't take major timing risks by going massively in and massively out of the market.
"A long-term buy and hold strategy minimises costs and tax,'' he says.
Some of the most recommended stocks by brokers in the past week for investors keen to take advantage of ripening stocks include BHP (bhp.ASX:Quote,News), ANZ (anz.ASX:Quote,News) , Westpac (wbc.ASX:Quote,News), National Australia Bank (nab.ASX:Quote,News), Macquarie Group (mqg.ASX:Quote,News), Babcock & Brown (bbi.ASX:Quote,News), Zinifex (zfx.ASX:Quote,News), Insurance Australia Group and News Corporation (iag.ASX:Quote,News).
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