Volatility is being driven by a battle for supremacy between the market bulls and bears, both unsatisfied with a low growth paradigm, T Rowe Price’s David Eiswert says. Photo: Wayne TaylorGlobal sharemarkets are trapped in an epic battle between bulls and bears, both equally frustrated by the lack of justification for their views, creating the recent wild swings that are stunning investors.
Global growth is slow, but not contracting; inflation is low, but deflation is kept at bay, and China’s landing, hard, soft or otherwise is unknown.
Every shred of economic data is being pounced on by both sides eager to add weight to their view of the world, resulting in volatility, David Eiswert, a US-based portfolio manager at T. Rowe Price told Fairfax Media on a visit to Melbourne.
“The world is not leveraging up and creating as much debt as it was prior to the global financial crisis, causing a very unsatisfactory paradigm of very low growth,” he said. “It’s not low enough for there to be a major crisis, and it’s not high enough to get people satisfied that it is breaking out.”
Investors have become used to six-monthly crises, a post-GFC phenomenon that has resulted in a short-term view on previously tightly held stocks, including financials.
The resulting volatility means investors hop from one stock to another, buying in dips and selling when they become overvalued on the recovery. Renting, not investing
“You’re renting things and you’re not really investing and it drives people really crazy,” Mr Eiswert, who manages T Rowe Price’s Global Focused Growth Equity fund, which holds about 70 stocks, said.
Those not wanting to play the game moved into “crowded” trades such as healthcare, industrial and technology stocks, which are anything but a value buy.
The Australian sharemarket is susceptible to these plays because is a highly concentrated index, he said.
The evidence can be seen in the high forward price-to-earnings ratios of the growth stocks including Domino’s Pizza Enterprises which is trading on a forward P/E ratio of up to 57-times versus the broader markets’ 16-times earnings. Local bulls, foreign bears
The ASX also may be caught in its own tug-of-war between bullish local investors and bearish overseas investors.
CMC Markets chief market strategist Michael McCarthy said the lower Australian dollar had attracted investors to short-sell the Australian market.
“If you are a US investor, if you sell the index at 5100, and the Australian dollar falls to US73¢ and it stays at 5100, you’ve got a profit anyway,” he said.
Australian investors, who have turned less pessimistic on their own market were being “pitted against” the bearish international investors, clashing in banking and mining stocks.
The resulting wild swings in the share prices of heavyweight miners such as BHP Billiton and Fortescue Metals Group are evidence of this.
Fortescue’s share price rallied 24 per cent on Monday, the result of short-selling activity and a surge in iron ore future prices, the company said in a response to a ‘please explain’ from the Australian Securities Exchange. Lift in ore prices
Terry Campbell, chairman of the Australian Foundation Investment Company also said much of the pain endured by mining stocks was caused by international investors using them as a proxy for their bearish view on China. Short sellers target Australian stocks linked to China because it was a liquid and well-ordered market.
The materials sub index has risen 15 per cent since the market fell into bear territory in February, led in part by a lift in iron ore prices, which have posted a remarkable recovery.
On Monday the benchmark price of iron ore for delivery to Qingdao rose 19 per cent, however it swung back on Thursday, retreating 9 per cent.
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