Sunday, 9 March 2008

When will the market start going up again?

Source: Julia Lee from Yahoo!7

The short answer is, when there are signs that profits are starting to increase.

As we know the sharemarket is effectively a market full of businesses. If a business is increasing in profitability, then business value should increase and the share price will invariably follow suit.

At the moment, the business environment is not ideal for profit making. Interest rates in Australia are going up eating into company profits, the Australian dollar is high also eating into profits and people are fearful of investing in business, so there is a lack of funding to expand businesses.

Add to this the fact that the Australian market is now down 15% in 2008, and it's been a nasty surprise for anyone that hasn't had any risk management strategies in place. It's also a bad time for companies that have taken on too much risk through excessive borrowing.

There is a chart called the "Cycle of Market Emotions" and it keeps on popping up. Basically it says that the market can be defined by fear and greed. When the market is greedy it goes from optimism to excitement to thrill to euphoria. Once fear sets in then it's feelings of anxiety to denial to fear to desperation to panic to capitulation to despondency to depression. And once fear begins to turn to greed, there is hope, relief and optimism - the cycle starts again.

At the moment, investors are fearful. For the emotional cycle to turn back to greed and optimism and for markets to rise, there need to be signs that the conditions for companies are improving. A key part of this is their ability to get funding in order to grow their business and hopefully grow their share price. Westpac came out to say that it has seen no sign of improvement in global markets. Until there are signs that the credit problems are easing, markets will continue to move sideways or downwards as has been the case in the last 9 months.

Now is a time to buy quality shares at cheap prices. By quality, I mean companies with low levels or no debt, good products, good management and good prospects for growth going forward.

All in all, the market goes up down but good quality businesses at reasonable prices are good investments when the market is rising and potentially even better investments as the market is bottoming out.