With reporting season basically complete it looks like corporate Australia is in pretty good shape. While I’m mindful of the fact that those results are all in the past and largely pre-lockdown, it is clear that the financial positions of our biggest companies are as strong as ever. BHP, Rio Tinto, the big banks, Wesfarmers and Woolworths all had great results. Many are seeing record profits and paying out increased dividends. With excess capital, low levels of debt, their balance sheets are in such good shape that many are returning that capital to shareholders via special dividends and share buybacks.
This is a positive as not only do investors get a bonus return it’s generally a sign of sound corporate management. If the companies are flush with cash and they can’t find ways to use those funds, either by reinvesting them within the business or using them to fund a new acquisition, then it is most prudent that management return the capital to the shareholders. In any case, with low levels of debt and the cost of borrowing being so cheap any takeover is more likely to be funded by debt or a share swap.
While corporate Australia is in good shape the stock market has already priced this good news in. The consensus is that lockdown has only delayed the recovery. In fact, for the past 12 months, the ASX has priced this in and at current levels doesn’t seem to put any weight on any downside risks or consider the potential that a recovery may not be a foregone conclusion. There is a chance that we go into recession. It is possible that the economy, even as it likely rebounds in the December quarter, doesn’t recover as quickly as everyone expects.
So, in my view, this is a good time to take a bit of profit. While I also think the economic story for Australia is still positive and that the economic recovery has only been delayed by recent lockdowns, I don’t think the stock market is really factoring in the potential risks emerging, including possible new covid variants and increasing geopolitical risk. Overall, I think there is more downside risk than upside at the moment. Company valuations are high on almost any measure. In the coming weeks, it won’t take much for markets to start to worry about some of these risks and for the ASX to pull back 5-10%.
I think it’s a good time to make some minor adjustments and take a small amount of profit off the table. Recently, we’ve started reducing our exposure to financials including Commonwealth Bank, retailers like Wesfarmers and Woolworths, tech such as Xero and Afterpay. These are great companies that have performed really well, and we continue to hold them. However, in my opinion, at such good prices it is prudent to lock in a little profit and reallocate capital to better value stocks or cash for future opportunities.
This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.
Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.