Sharemarket turmoil


As the tsunami of red ink on bourses the world over starts to recede investors are still looking for someone to blame. Was it Chinese officials that unleashed a range of desperate measures to resuscitate its stock exchange as the Chinese economy slows? Were the markets simply ripe for a fall after such a strong run? Is it the spectre of higher interest rates in the US? Or has the explosion in ETFs impacted market liquidity by compounding market movements as they respond to price changes?

The fact is we will never know, and if you're still looking for the reasons then you're missing out on opportunities to invest in great businesses at attractive prices. I have no idea where markets are heading in the short term, but since 2011 I've been warning anyone who cared to listen that a slowing Chinese economy spelled trouble for Australia. If you're going to take advantage of Mr Market's latest temper tantrum, make sure the prices you pay compensate you for further economic pain close to home. The next 10 years in China and Australia will not look like the past 10.

Right now investors are wondering whether recent losses signal the beginning of another financial crisis. The answer will only be revealed in hindsight, so there's no point trying to pick market tops and bottoms. If you're waiting to buy Flight Centre below $4 again or American Express for less than $10 then you're likely to be disappointed. This is the time to reflect on the stocks in your current portfolio, jettison those that shouldn't be there and replace them with businesses that are undervalued and offer superior risk-adjusted returns.

stockmarket plunge

Unfortunately this is not one of those times where everything is cheap, and the market could easily fall a long way from here if the global economy were to slow dragging down today's lofty valuations with it. That means you still need to focus on stocks that are under pressure for company or industry-specific reasons, as they're far more likely to be undervalued.

We recently added Rolls Royce to the Peters MacGregor Global Fund after its share price had dropped by a third due to lousy past acquisitions and management that seemed intent on destroying value. The share price may continue falling along with markets in the short term but, with ex-ARM Holdings chief Warren East now in charge, over time as its new range of fuel-efficient engines and extremely profitable maintenance and repairs contracts increase profits, investors will once again focus on the quality of the business and not what or who sparked the latest panic on the sharemarket.



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