Three reasons why I am still bullish on this market

Roger Montgomery

Montgomery Investment Management

Over the past 12 months, the All Ordinaries index and the S&P 500 have risen around 26 and 35 per cent, respectively. Not bad when you consider the economic ravages of the COVID-19 lockdowns. But despite these strong performances, there are three good reasons to believe sharemarkets will continue to climb over the coming year.

A number of investors have asked us whether now is a good time to add to investments or start a new portfolio for family members. My usual answer is that we simply don’t know what share prices will do day-to-day. Given a reasonable strategy is to spread investments out over a period of time, taking advantage of any weakness in prices that might ensue is pertinent. Of course, the risk with such a strategy is that investors miss out when uninvested if markets rise.

Last month’s market strength highlighted precisely this risk. In August our Montgomery Small Companies Fund rose 6.71 per cent outperforming its benchmark by 1.73 per cent. The Montgomery Fund rose 4.78 per cent outperforming its benchmark by 2.17 per cent. The Montgomery Fund rose 4.62 per cent outperforming its benchmark by 1.90 per cent and the Polen Capital Global Growth Fund rose 2.92 per cent underperforming its benchmark by 0.17 per cent. All of our funds are close to fully invested.

Reason 1 – The path to reopening

Generally, macroeconomic data and dovish central bank monetary policy settings are overwhelming any fears of the Delta strain of Coronavirus disrupting the path of recovery and reopening.

The reopening of the highly vaccinated populations in the US and Europe demonstrates a spike in infections as restrictions ease; however, severe illness, hospitalisations and fatalities remain subdued. Consequently, confidence is growing that vaccines work, in aggregate.

Optimism, albeit more muted amid continuing suppression strategies, also exists here in Australia. Reporting season’s CEO outlook statements painted a picture of hesitancy with businesses unable to quantify the full financial impact of current restrictions on their businesses over the coming year.

For the moment, the consequence of local lockdowns and overseas reopening is that investors favour businesses with offshore earnings.

Importantly, however, Australia’s attitude to COVID-19 is shifting. Consequently, vaccination rates are accelerating, and the idea of elimination has been traded for suppression until vaccination coverage reaches set targets. By late October or November, states are expected to reach those targets and a phased relaxation of restrictions is anticipated.

Reason 2 – Low-interest rates

Meanwhile, Australia’s and the major US equity indices are trading within a whisker of record levels. This, even as market participants try to guess whether the US Federal Reserve and our local Reserve Bank are on the cusp of tapering their unconventional expansionary monetary policy settings. Indeed, the Reserve Bank of Australia remains confident the economy will recover, and is pressing ahead with plans to begin reducing its weekly bond-buying stimulus to $4 billion (still much bigger than what markets were anticipating at the start of the year).

The bullish argument, however, is that even if the US Federal Reserve’s goal of maximum employment, and inflation reaching two per cent as well as “on track to exceed two per cent for some time,” they can raise interest rates up to four times with the real rate of interest remaining negative. This is bullish for equities through both valuation and popularity.

Reason 3 – Monetary support

Meanwhile, economic growth globally is by no means even and remains supported by unconventional policy settings, suggesting central banks are in no rush to pull back on monetary support.

Further, two excellent points made by analysts and commentators are first, Japan’s ability to monetise a significant portion of its government debt without major economic consequences, which provides something of a template for the West’s central bankers who might otherwise doubt the policy approach hitherto adopted. Secondly, fears of a bond market collapse (which would be terribly bearish for equities) need to be balanced against the real US yields are attractive relative to alternatives in Europe and Japan, which offer zero to negative yields.

My conclusion

Notwithstanding the ever-present reality of a 10 to 15 per cent correction, provided the status quo with respect to current sentiment regarding the above factors is maintained, it is reasonable to expect another year of positive returns.

Investors concerned about whether now is a good time to invest might consider presenting the above arguments to their adviser.

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Roger Montgomery
Chief Investment Officer
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger brings more than two decades of investment, financial market experience and knowledge. Roger also authored the best-selling investment book, Value.able.

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