“Buy the dips has worked for the last decade, if not longer, so this generation of investors has been conditioned to believe that that is the right strategy,” Mark Lister, investment director at Craigs Investment Partners, says.
The most obvious example of that was the Covid recession, when markets took a massive hit but then recovered quickly.
“Now a lot of that was because of government stimulus, which won’t always be there to help, so there was an almighty rebound,” Lister told Stock Takes.
“Then in 2022, we had another bear market in the United States, which was interest rate-driven, and the bounceback wasn’t as quick or as sharp.”
Then there was the adverse market reaction to US President Donald Trump’s arbitrary imposition of trade tariffs last year, but the market bounced back from that, too.
Mark Lister is investment director at Craigs Investment Partners.
“There have been smaller declines where the same thing has happened,” Lister says.
“So if your only experience of markets was just over the last decade, you would have built a view that ‘buying the dip’ works pretty much all the time.”
And if a strategy is working, why change it?
“I think that’s exactly where we’re at.
“We’ve got to cast our minds back pretty far to find a time when buying the dip didn’t work.
“You’ve got to go back to the Global Financial Crisis to find a time when it didn’t work and the recovery was not swift, or as fast and aggressive.
“It was slow, challenging and really grinding, and that’s a long time ago now.
“So people are just doing what history has shown them.
“Does it worry me? Yes, a little bit, because I think the difference with all of those recent examples is that they weren’t real recessions.”
Lister doesn’t count the Covid recession as a real downturn because it was orchestrated by governments as their countries went into lockdowns.
“It was kind of artificial, and that’s why things swung back so quickly.”
In 2022, the US market sell-off was not accompanied by an official recession.
Likewise, last year’s tariff-driven sell-off was not accompanied by a downturn.
“The declines you’ve had in sharemarkets over the last decade have not been accompanied by genuine economic weakness of the type that causes those more painful, slower recoveries like we saw around the time of the dotcom bubble [in 2000].
“That’s what worries me. What happens when you get a market sell-off that is accompanied by genuine recessionary conditions and economic weakness – the snapback might not be quite as quick.
“That’s something for investors to keep in mind.”
But Lister says Wall Street’s current run looks to have been backed by improved corporate earnings, even from those companies outside the high-profile “magnificent seven” tech stocks.
“My take is that buying the dip will work if you don’t get a genuine bout of economic weakness or recession. That’s why I think it has worked for the last decade.
“But there will come a time when there is another genuine period of economic weakness and, at that point, buy the dip might not work as well.
“Investors may need to have more of an awareness of history going back further than these last 10 or 15 years.”
More data centres?
The rush to artificial intelligence (AI) and the need for more data centres to drive it have been key drivers of Wall Street’s bull run, while the local market has been largely devoid of such themes.
That’s apart from the dual-listed Infratil, which rallied sharply on the news that its half-owned CDC had secured the largest data centre contract in Australia’s history.
The 30-year contract is with an as-yet-unidentified high-end US investment-grade customer and is inclusive of renewal options of up to 20 years.
Harbour Asset Management portfolio manager Shane Solly said the vibe from the Infratil-CDC conference call was that there was more to come.
“There was certainly a degree of confidence that they [CDC] can execute and deliver.
“They were chosen by this counterparty based on their existing and proven ability to actually deliver capacity.
“The sustainability credentials of CDC were highlighted by the new client,” Solly said.
“And I think also there’s more to come.
“The CDC team were of the view there were more contracts to come through.”
CDC expects 2027 capital expenditure to be between A$3.8 billion ($4.6b) and A$4.2b, excluding land, as data centre construction lifts to meet market demand.
By way of context, that compares with Auckland International Airport’s planned capex for the current year of around $1b.
Forsyth Barr said the contract was a step change for CDC and one that was well above its own expectations.
“Current demand is incredibly strong for data centres,” it said.
A2 Milk recall
Forsyth Barr has taken some comfort from the limited nature of a2 Milk’s product recall in the United States.
This week, a2 Milk announced the recall of three batches of a2 Platinum infant formula sold into the US because of the detection of the toxin cereulide.
Other major brands such as Nestle and Danone have also undertaken product recalls, for the same reason, earlier this year.
A2 Milk believes the issue is isolated to the US-labelled product, which uses a different formulation and relevant ingredient from the a2 Platinum product sold in China and other markets.
The direct financial impacts of the recall were immaterial, Forsyth Barr said.
“However, there is heightened adverse risk for a2 Milk’s brand, particularly if the recall is not contained.
“It is difficult to assess what impact (if any) the recall will have for ATM’s [A2 Milk’s] sales in China, but we see Danone’s January recall as the most relevant precedent given the shared root cause (cereulide) and the absence of direct product withdrawals in China.
“We take comfort from the relatively limited impact to Danone’s business in China, but recognise there is a wide range of potential outcomes, including further recalls.”
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
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