MARKETS SPECTATOR: Shifting global goalposts

Around the world, markets are in flux, with trouble in London, movement in Tokyo and wobbles in Oz.

Heading into the Easter break, I thought it was time to step back and have a look at the big picture in terms of where the best investment opportunities may be for the remainder of the year.

Throughout the depths of the eurozone crisis, the sterling was largely sheltered due to the inflow of funds from Europe looking for a safe haven. With Europe stabilising we’ve seen that money exit, which has put a lot of pressure on sterling denominated assets. Just to make things worse, the new Bank of England governor has made it pretty clear that they’ll be largely ignoring the 2 per cent inflation target and implementing further quantitative easing measures, much like their friends across the Atlantic.

Needless to say, the outlook for the sterling looks grim at best given the economy is about to enter its third recession in five years. From the technical chart above, things look bad as it has broken down through major support and now looks likely to unravel further towards previous lows of $US1.45 and $US1.40. This has the hallmarks of a multi-year unwind, especially with the US dollar recovering, too.

Sticking to the currency theme and I’ve made my feelings pretty clear over the last six months about where I think the Australian dollar is headed. Suffice to say I don’t need to add too much more. The recent bounce on the back of the Cyprus story has given a great entry point into potentially another big unwind.

When your own central bank has said in no uncertain terms that it wants to get the currency down, then it’s wise not to fight it. From the bear’s perspective, it’s going to be harder work than for the pound sterling but I think in a year's time we’ll be looking at a dollar that is sub-parity. 

From an equities perspective, I’d recommend looking for those names that will benefit from a falling Australian dollar, like the big resource names that report in US dollars.

Continuing on the equity market theme and I think we’ve come to a point where one can no longer ignore Japanese equities. They’ve been in the doldrums for years but the new regime seems hell-bent on weakening the yen to spur a recovery in growth, no matter what.

Unsurprisingly, this has awakened the Nikkei 225, as can be seen in the long term chart above. The index is breaking up through a long-term downtrend line, which indicates the momentum has definitely shifted to the upside. The other hugely encouraging factor is the massive leap in volumes we have seen. Strongly rising volume at the beginning of a new trend shows a large amount of participation, which can only be a positive.

And I think there is a lot more to come. Domestic and international money managers, especially the big Japanese pension funds, have been heavily underweight Japanese equities for years and are now just realising that it’s time to increase that exposure. When the new Japanese fiscal year begins on April 1, we’re expecting to see a lot more money being allocated to Japanese equities, which should help to propel the market even higher. The long-term chart above shows what the Nikkei 225 is capable of when it gets up a head of steam.

Last but not least is the Australian market. Not the broad market, but the very unloved resources sector. Sentiment towards the big miners is the worst we’ve seen in years and is getting to the point now when contrarian investors start licking their lips.

Don’t get me wrong; the hardest thing to do right now is step in and buy BHP and Rio. But I think it is the right thing to do. If being greedy when others are fearful works for Warren Buffett, then it should be good enough for us. 

The chart above shows the spread between the S&P/ASX 200 index and the S&P/ASX Metals and Mining index, which is dominated by the big miners. It shows that currently, the broad market index is outperforming the metals and miners by the most in five years and it is approaching the record high we saw back in late 2006.

The likes of Rio and BHP are being priced as if China will only be around for another year or two. Unfortunately, markets are becoming more and more short-term focused. Herein lays the opportunity in my mind. If you can honestly look out three to five years then these miners are a screaming buy.

In terms of sentiment towards resource names, we’re clearly in the eye of the storm at the moment and it may continue for another couple of months. It’s very difficult to pick when these stocks will bottom so my advice would be to slowly start putting some money to work in these huge, diversified names.

As the world realises that the demand from the likes of China and developing nations is going to be around for a lot longer than a few years, these stocks will begin to be re-rated to where they should be trading.   

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