Turning down the noise

We have noticed a number of recurring comments in recent months which all add up to the same underlying theme: extreme investor caution. This is consistent with the data presented in the chart below which shows that global fund management cash levels are currently at multi-year highs. This highlights just how bearish the global financial community is at present. We can’t remember a time in recent years beyond the aftermath of the GFC when the consensus was so negative. All other things being equal, these elevated global institutional cash levels suggest to us that markets are now arguably sensitive to any good news, and insensitive to any bad news. We see this as an opportunity for long term stock pickers. In this article we highlight some key action points to ensure you profit from current investor caution.
Steve McCarthy

DMX Asset Management


Let’s delve into the list of the most common investor worries we have encountered  with a view to seeing through the noise:


1. “The global economy is weak.”


This is undoubtedly the consensual view at present, and it is definitely being reinforced in peoples’ minds by the constant barrage of negative media articles and emails predicting the end of civilisation.

However, the recent data shows that the global economy is currently relatively stable on a low growth trajectory:

Global GDP (YoY, %) (source: Credit Suisse):

In our opinion, whether the global economy grows at 2% or 2.5% over the next year won’t significantly impact upon any of DMX Capitals Partners’ portfolio holdings. There is always the risk of a global recession but these tend to follow periods of booming economic growth which is clearly not the case at present. The very fact that global economic growth has been so pedestrian since the global financial crisis gives us a degree of confidence that we are not exiting a boom and thus entering a bust.


2. “I am concerned about more downgrades for ASX corporate earnings looking forward.

The past 3 years have clearly been a difficult period for ASX corporate earnings as shown in the chart below compiled by Credit Suisse. However, their analysis suggests that the outlook is generally brighter after multi-year periods of downgrades as we have recently experienced:

ASX 200 EPS recessions and recoveries (source: Credit Suisse):


3. “I am happy with my cash sitting in a term deposit.

We are not involved in the business of providing financial planning advice. However, in our experience investors who are aiming to create significant wealth over the long term generally need reasonable equity exposure. Cash sitting in a term deposit is likely to roughly hold its ground versus normalised inflation over the long term, and after tax may not even achieve that. Whilst a cash buffer provides valuable protection against market volatility, it is clearly not a wealth creation strategy. 



  • Stick with stock picking - This is arguably the most important point because the vast majority, if not all of, the investor worries listed here are likely to be nothing more than noise when we look back in 5 years’ time. From that future perspective many of us are likely to be thinking,  why was I so worried? If you stick with bottom up stock analysis aimed at investing in high quality businesses which are significantly under-valued you are likely to be focusing on the right drivers of significant long term wealth creation.


  • Turn down the TV and radio – Stop listening to the media noise which can only serve to heighten your emotions when investing. In our experience too much media exposure only serves to make investors more short-term focused and less effective at focusing on the fundamentals.


  • Check stock prices once a month instead of hourly – Watching stock prices too often tends to make investors more short-term oriented and less aware of stock valuation fundamentals.


  • Develop a financial plan which is consistent with your long term goals and stick with the plan – This is self-explanatory; having the right plan in place and sticking with it is the only way most investors will reach their financial goals.


  • Remember that equities tend to outperform cash over the long term and deserve a place in most portfolios:

source: Switzer


  • Dollar cost averaging is an effective means of building equity exposure without making a market call:

"Dollar-cost averaging is achieved by buying equal dollar amounts of investments at regular intervals. It takes advantage of dips in the price and means that an investor doesn’t have to be concerned about buying his or her entire position at the top of the market. Dollar-cost averaging is ideal for passive investors and alleviates them of the responsibility of choosing when and at what price to buy their positions." Daniel Myers, Investopedia


CONCLUSION: Investor caution is currently at high levels with many investors focusing upon the “worry list” rather than the opportunities available at a stock level. In our experience, moments like this can offer significant opportunities for investors focused upon finding undiscovered smaller company gems. Whilst we don't know what the future holds, we do know that on average over long periods of time, equities tend to be a relatively high returning asset class. Dollar cost averaging is an effective method of building equity exposure without making a market call, and is reflective of why we slowly build our positions in DMX Capital Partners throughout periods of market weakness. 


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Steve McCarthy
Portfolio Manager
DMX Asset Management

DMX Asset Management Limited is an investment manager focussing on nano and micro-cap value opportunities on the ASX.

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