A Monday morning sanity-check and market analysis for all ASX equity investors, futures down 110 points

European and US stock markets sold off heavily on Friday night. The US S&P 500 remains on a price-to-earnings ratio (PE ratio) of nearly 20, meaning that the average company listed on that index is priced at 20 times its historical 12-month earnings. This key metric--throughout the majority of 'normal' periods of economic activity--will generally drift between 10 times and 20 times, and then jump outside of that range when earnings and/or sentiment are negatively impacted, or if traders get over-excited - think the years leading up to the 2000 tech boom/bust. Australia's ASX 200 estimated 2015 PE ratio is 15.24 times, which is hugging its long-term 14/15 times average. Australia's largest listed company sectors--resources and financials--have already been judged harshly of late with regard to the big re-rating in miners and mining services companies since the commodities boom receded years ago and the Financial System Inquiry that has created a more onerous operating environment for Australia's big banks. The ASX 200's PE ratio did climb to historically-high levels earlier this year (a little over 17 times) and we've now come back into the 2013/2014 range.

Even with this in mind, of course US and European equity sentiment unfortunately will spill directly into our market today with our futures down--albeit not as much as in the US and Europe--by 110 points or 2.1%. I think what we're in for, at a macro level, is a sharp and potentially transitory hit to global emerging markets--those developing economies that tend to add to global GDP growth by vastly outpacing the regular 2-3% growth of developed economies--and to get an idea of what this means for sentiment we can go back to a similar theme that emerged in 2011 when the BRIC economies (Brazil, Russia, India, China) slowed down after having sailed through the GFC relatively well, compared with developed nations. The ASX 200 fell about 20% during that 2011 period, and after today's sell-off we'll probably be down about 15% from our March 2015 highs.

Now I don't have a crystal ball so I can't say with great certainty that the market will sell off by an additional 5% and then begin to rally, but I think it's a pretty good period of comparison and I do think that the post-GFC recovery in US indices has been a bit silly (see today's second chart) and if the market wants to reprice itself there, then I don't think that's unreasonable. But it would be unreasonable for the Australian market to re-rate itself to the same degree, and for that reason it will pay to have a wishlist of stocks on hand that fit the old Rene Rivkin test: "When buying shares, ask yourself, would you buy the whole company?"

For those who follow Rivkin's recommendations religiously, you'll know that we're not the types to spin the old financial advisor line of "Just stick to your strategy, everything will be ok". As I remind members constantly, the key benefit of being a direct investor is that you are one phone call away from selling up your portfolio going to cash. The Rivkin Local Model Portfolio is presently holding over 20% in cash, 10% in market-neutral event-driven strategies and about 35% in incomes securities - so members should be outperforming this sell-off quite significantly. It's really our Blue Chip strategy allocation that gives us our general market exposure, at that sits at around 35%. If we feel that there was something systemically-wrong with corporate Australia or the global macroeconomic environment, we will gain greater exposure to cash so members should revisit the Model Portfolio page and make comparisons to their own portfolios.

One last note, with reference to today's last chart, is that the ASX 200 began the sell-off a lot earlier than the S&P 500 this month. So while the US falls have been incredibly sharp, you can see that since the beginning of August the ASX 200 futures market (we use this to take into account Friday night's move) is down 9.98% for the month versus the S&P 500's 6.70% - so the ASX sell-off really is a little overcooked, but let's not think for a second that means it'll turn around just yet. A good 20% drop from 2015's highs (another 200 points or so) is what I think would really exhaust selling in Australia, but let's remain tactical if need be.

Source: Rivkin, Saxo Bank

To view the Rivkin economic calendar and Global Markets matrix, members can click here.

This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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