Long-term market confidence is back

The Reserve Bank of Australia indicated in the February post-meeting minutes that the global economy has entered a lasting expansionary phase and has finally turned a corner*.

The comments are led by a number of strong economic data around the world, which has led many to believe that the recent change in sentiment is the real deal. Domestically, we are seeing higher business and consumer sentiment, along with an impressive reporting season, with 45% of the ASX200 companies beating their EPS estimates and only 33% missing^.

It wasn’t just low expectations either, 77% of companies delivered positive earnings growth.

Globally, we are seeing increased industrial production and trade flows. In the US, markets are seeing an increase in equity purchasing with investors preferring stocks over bonds. US buy backs have also resumed with reporting season in the US wrapped up^.

Short-term volatility

We can expect short term volatility, as Trump works through his fiscal stimulus plans with Congress. Many view these as opportunities to buy the dips. Investors are noticing that recent dips in the market have been short lived, as money moves from defensive asset classes such as bonds back into equities.

Market momentum remains strong; however, the market is far from acting overly euphoric, which is a common trait at the top of a market cycle. Instead, there are a number of indicators that suggest that we are far from being at the top of the investment cycle - such as, low inflation, loose momentary policy and little sign of over-investment.

Warren’s word

Warren Buffet's annual letter to Berkshire Hathaway shareholders is also a much anticipated event. This year he reminded everyone of the resilience of the US economy. His words are certainly encouraging for setting up a long term equity strategy.

Here are some of the key takeaways in Buffet's own words:

• “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.”
• “During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

Looking to buy into the market dips?

If you are interested in participating in ‘buying the market dips’, contact your Relationship Manager on 1300 307 807 to ensure that your account is active and has capacity.

*http://www.rba.gov.au/monetary-policy/rba-board-minutes/2017/2017-03-07.html ^http://www.nikkoam.com.au/knowledge-dividend/nikko-am-aus-investment-research/february-reporting-the-confession-season