Riding those cycles to success

A NUMBER of private investors in Perth got telephone calls from their brokers early in the year urging them to sell their boring old defensive banking shares, and buy beaten up cyclical growth companies.

The strategy worked for about a week. CBA tumbled to $29.90 and ANZ got down to $13.80.

Both banks have recovered strongly, with CBA nudging $32 and ANZ bolting through $15.

An elderly friend of mine who was spooked out of the CBA she had held for five years is threatening to take a walking stick to her young “financial adviser.”

Markets go up and markets go down, but the best way to sleep at night is to have a well diversified portfolio that provides a return of about 5 per cent, with lots of franking credits.

That means banks, property and infrastructure stocks, good quality industrials, and perhaps a Qantas or a TAB. It may not be wrong to buy straw hats in the winter, just early. The Australian market has priced in a decline in earnings this year,and share prices are well supported by the fall in 10 year bond yields to a skinny 5.37 per cent.

One of the smartest cookies in the investment caper is the chief equity strategist of UBS Warburg in Sydney, Sakthi Siva.

She says that in the last five cycles of the Federal Reserve cutting rates, going back to 1984, equity markets began to take off six months after the easing began – that means June.

In the case of Australia, the average rise was 11 per cent.

The UBS lady believes global industrial production will hit its trough in September.

So what should we start buying before round six of the footy season?

Why the grandfather of cyclicals, resource companies, of course.

This time last year the market was gripped by a collective madness.

Many mining companies turned themselves into vehicles.

Worse, a number of brokerage houses dragged protesting analysts away from the resource desks and sent them off to learn techno-twaddle.

As a result, the mining sector was neglected and it has never recovered.

Last week a few early birds were picking up MIM, Rio, BHP and Western Mining.

The beauty of buying our mining houses is that many are atrociously managed.

If they cannot earn a decent return on equity, a foreign takeover predator will come along who can.

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