To take advantage of the economic downturn, advisers should scope for stocks that currently trade under the average price-to-earnings ratio, pay good dividends, and hold a high international ranking, according to Chan & Naylor.
David Hasib, a partner and head of financial planning at the national accounting firm, identified the key factors to look for when deciding which shares present the most viable opportunities.
The first is price-to-earnings ratio (PE ratio). "The markets suggest that 15 to 16 per cent PE ratio is the average. So when you have a stock trading under that average, say around 10, then you’ve got yourself a bargain," Hasib said.
Another indicator is good dividends. "If the company is making tremendous profits yet their share prices are depressed because of the link to the global economy, then that should be a very good sign that you will get good dividends from holding that company’s stock," he said. "And often, in Australia, dividends are either partly or fully franked, so, in effect, you get paid to watch stocks grow," he added.
Companies that have been well ranked internationally are also worth looking out for. "If you look at Australia’s ‘big four’ banks, they are in the top twelve in the world," Hasib said.
Advisers and investors should also pay attention to the shrinking market. "The banks seem to be gobbling up just about every financial services entity that we can think of. There aren’t too many independents left. So that in itself – either unfortunately or fortunately, depending on whether you own shares in that company or not – should give the investor some confidence," he said.
So how should advisers approach the situation with their clients?
Hasib said communication is crucial. "The first thing advisers need to do is communicate with clients. They cannot just hide under a rock. They really need to communicate and reinforce the strategy from day one.
"I use a simple analogy that if you’re on a plane and you go into turbulence you don’t jump out of the plane, you ride it out, because it’s all part of a much bigger long-term picture that you have to be reminded of."
Advisers also need to ensure that the right asset allocation is within the client’s mix of investment, and that the investments are relative to the risk tolerance, he noted. "If someone is very risk averse and they have, shall we say, a very volatile portfolio, then perhaps the adviser needs to recalibrate that so it is in line with the client’s risk tolerance, as this dictates behaviour" Hasib said.
When asked how careful advisers and investors need to be in the current market environment, Hasib said, "Every step needs to be a cautious step; it needs to be a calculated step. So, perhaps an adviser and a client should consider a dollar-cost averaging into the market, as opposed to going in with a lump sum. That way, if it’s a dollar-cost average then you start to flatten the volatility curve, in most cases."
"Finally, don’t make fundamental mistakes – avoid panic and knee jerk reactions, such as selling at a bad time and then going in when the market has already gone up. These are mistakes that a lot of advisers – and particularly more investors – are making, and these erode your potential."
They say that if you miss the top five days of the sharemarket in a year, that could indeed result in a significant loss in the end result of the financial year. "For this reason, you really need to be in the market rather than timing the market," Hasib said. "Timing the market is a bit of a fool’s game unless you’re a day trader, an analyst, or a fulltime expert in the field," he explained. "What’s more important is having the right asset allocation, which is critical, and having the right mix in those allocations relative to your risk tolerance."
Hasib reminded advisers and investors that "Australia has one of the best, one of the strictest systems of corporate governance in the Asia-Pacific, and we are often seen for compliance around the world".
