News

A Time for Greed – Buy Australian

CMC Markets

Warren Buffet’s recommendation that value investors should be “greedy when others are fearful” can be applied to the Australian share market.

Investment metrics are showing that the market is in value territory – the price to earnings ratio for the Australian 200 Index is between 11 and 12, and the dividend yield is around 4.5%. Taking into account tax benefits attached to dividends, and depending on individual tax situations, that yield could be greater than 6%.

Additionally, the market is sitting on key technical support, illustrated in the daily chart of the Australian 200 Index below:

Markets are currently stalked by fear. Fear of a European debt contagion, fear of markets being held hostage by US politicians, fear of massive oil price blow-outs, fear about a collapse in consumer activity – the list goes on. These fears are reflected in the index level – now more than 11% below the peak reached in April.

While it’s always important to be aware of risks, it’s also important to note that none of the fears have materialised at this stage. With reporting season starting in Australia, there is a real chance that clear evidence will emerge of healthy earnings and balance sheets. If agreement about budget deficits and debt management US is reached next week, the combination of these factors could spark a sharp rally in the 200 Index.

Potential Trades:

Buy the Aussie 200 Index at current prices 4,448. Stop loss at 4,426. Take profit at 4,588.

Buy the Aussie 200 Index at current prices 4,448. Stop loss at 4,407. Take profit at 4,738.

Buy the Aussie 200 Index at current prices 4,448. Stop loss at 4,390. Take profit at 4,850.

Investors should put serious consideration into increasing exposures to Australian shares at current levels.


Sign up for market update emails