By David Scutt
Veteran portfolio manager Ben Griffiths doesn’t pretend to know how damaging the coronavirus outbreak will be on the global and Australian economies, or how much it will hit corporate earnings. But he does know what signs he’ll be looking out for to know equity markets have bottomed.
“I want to see the market’s reaction to bad news,” the co-founder and managing director of the $1.5 billion fund manager Eley Griffiths said in an exclusive interview with The Sydney Morning Herald and The Age.
“If companies start coming out with profit warnings after a decent retreat and their share price rallies, that tells me as a professional investor that bad news is so absorbed into share prices that they can no longer go down. You need to see that play out.”
The coronavirus pandemic has sent global markets into a tailspin, triggering one of the most brutal sell-offs for shares in history. But any canny investor knows that a crisis creates a buying opportunity. It’s just a case of knowing when to time your entry.
Panic can be a buy signal
For his part, Mr Griffiths will also be paying particularly close attention to media reporting of the virus outbreak as a contrarian signal. “You need to see distress,” he said. “I need to see some headlines that say markets are over, fortress Australia, all hope lost, equities are due another bad decade. Headlines like that will be an important precondition for a bottom.”
Having begun his career shortly before the 1987 stock market crash, Mr Griffiths said the mindset of the analyst community will be another key pre-condition for signs of market capitulation.
“Just bad news just being discounted, or strategists both here and Wall Street coming out and slashing equity allocations and putting all their money into cash,” he said.
“They’re the sorts of emotional tried and tested indicators that will generally tell you that you’re in a bottoming stage in the market. It happens every time, as much as you need the exhaustion at the top, you also need to see it at the bottom.”
With equity markets both domestically and abroad continuing to gyrate wildly from one day to the next depending on the latest batch of virus headlines, Mr Griffiths believes markets are still a long way from signalling a bottom.
“Clearly a bit of time needs to pass. It would be unusual for a deep correction to be over in 15 days,” he said. “Normally stock markets need a period of consolidation. They need to get tired.”
While he believes we’ve not yet reached the point where the all-clear can be declared, he knows what pockets of the equity market are likely to lead to the eventual market recovery.
“Quality always rises first. Penny dreadfuls, concept stocks and punters’ favourites – those names that were doing well before the market corrected – normally lay dormant. They are the last to revive,” he said.
“Money flow goes straight into the leaders’ and high-quality names, both small and large will get supported immediately. It’ll be quality names in the first instance that reverberate, that’s for sure.”
He advises against buying beaten down companies which need to raise money, or whose balance sheets are challenged, warning they’ll likely “stay down and stay down for a while”.
He’ll also be looking for how much fiscal stimulus will be doled out to help offset the economic impact from disruptions caused by the coronavirus outbreak.
“Depending on how much stimulus is ladled out could well dictate that cyclicals, as a group, revive fast and revive first,” he said, highlighting resource stocks as falling into that bracket.
After suffering the largest one-day percentage fall on record at the start of this week, Mr Griffiths is also eyeing opportunities in Australia’s listed energy sector, if Saudi Arabia and Russia can resolve their differences when it comes to crude oil supply.
“Major oil stocks have been thoroughly flattened,” he said. “I think with a more constructive supply arrangement between the cartel and Russia, you might see those stocks recover. They’ll be caught up in that global revival.”
While he has a plan for when the coronavirus threat passes, Mr Griffiths isn’t rushing to buy despite cheaper valuations.
“We will start compiling a shopping list, although we’re not in any rush,” he said.
“We are nibbling at a couple of names such as Auckland International Airports, Elders and Lovisa. Those stocks have reset to levels that we think are attractive or have got some good underlying fundamentals. We think the market has mispriced them somewhat.”
And should the market rout worsen, he believes now is the time for investors to prepare their own shopping list and have cash ready to deploy.
“The playlist of every correction is the same,” he said. “You want to have lots of cash, and you need to have a shopping list and you need to know what you’re going to look for in terms of when you think it’s safe to come out.”
From a longer-term perspective, Mr Griffiths believes investors – both new and experienced – should not rely solely on the equity market for signs of potential trouble.
“Be very aware of where the absolute level of price-to- earnings multiples are compared to historical norms, and where equity risk premiums are relative to bonds, so you know whether you’re in a buy market or a sell market. You need to have an eye on valuation,” he said.
“And having established valuation, or your level of comfort or discomfort, you need to absolutely know what credit markets are telling you in the same breath. The two are completely connected and the stock market can only work when the credit markets are working properly.”
Somewhat unusually for an equity investor, Mr Griffiths believes it’s the latter – credit markets – that need to receive far more investor attention. “The credit market is populated by fast, smarter people than in the equities business, so I like to use their signalling as the lead indicator on whether I should react to my valuation signalling or not,” he said.
“The interplay of those two variables is never really talked about or emphasised by investors. It is mission critical for successful sharemarket investing.”