ASX and Global Share Markets Stock Markets around the world were hit about 8% on Monday and are down almost 20% since mid-February. It’s carnage! Now a Stock Pickers Market: Strong Small Cap Buying opportunities with 3-5 year outlook Basically we’ve gone from being in an ETF driven momentum market, to going the other way because those same ETFs are not buying, they’re selling. It’s now a stock pickers market. We’re factoring more volatility but the bottom line is that we think that this is a buying opportunities for Small Caps for ASX Small Cap Stock investors willing to hold on for 3-5 years. Stock fundamentals have taken a back seat to sentiment for now. We think it’s a case of looking for Quality undervalued Small Caps and Blue Chips, establishing where you think value is, holding your nose and buying your small caps in small parcels. What Small Caps do you buy? The 10 Small Caps we had in our last small cap stock report are a great start where we gave bargain prices on 10 ASX listed Small Caps that we believed were bargains. In the last week the share prices have dropped even further but these are quality, performing companies that we believe are the BHPs of the small cap world. Caroline and I are buying shares in smaller parcels, less than a quarter of what we planned to spend in the market, dipping our toe in and buying slowly. Our investment strategy is a sensible one, to slowly build up our small cap holdings through this volatile period. We don’t think it’s a good idea to wait until the stock market turns, because it will be aggressive when it does, so our advice is to start buying. What’s happening on the Share Market, especially on the ASX? The main factor as everyone knows is the coronavirus; but this has been exacerbated by the fact that the stock markets including the ASX have been trading at record levels, which means that risk assets like shares have been expensive. What has exacerbated the situation most recently has been Italy’s policy of quarantining first the north and now its entire 60m plus population; and then there is the oil price, where it seems the Saudis are taking advantage of economic weakness to turn on the taps and aggressively discount to eliminate marginal producers, namely North American frackers. This is their second attempt. The coronavirus is a reminder that we have to be careful about washing our hands, not touching our faces and risk assets, which is one reason we have been advocating taking profits. What gives you confidence about the long-term to buy ASX Small Caps now? A factor that ASX Small Cap investors and indeed all ASX stock investors need to remember is the assertive action by Central Banks around the world. The Fed Reserve has cut interest rates by 50 basis points and will probably go again before too long. Australia is following suite and will most probably enact a form of quantitative easing. Their powder hasn’t run dry and Central Banks have far more influence on the economy than governments in terms of fine tuning fluctuations through the economic cycle. Why do low interest rates help the Share Market? Low interest rates boost asset prices. This is going to be the case for some time because key central bankers have known about the global savings glut since 2000. Greenspan called it a conundrum and Bernanke more specifically called it out a few years later. Rather than thinking about implications of low interest rates; it’s more meaningful to ask why interest rates are so low. The quick answer is the global savings glut. There are not enough profitable investment opportunities compared to the amount of capital available. This global savings gut pre-dates QE, having started as early as 2000. Greenspan called it a conundrum, why tightening short-term rates occurred at the same time as long term interest rates were falling; Then Ben Bernanke in 2006 worked out that global savings glut mean that there was a shortage of profitable investment opportunities relative to capital. What about the ASX listed bank stocks? Since mid-February the big banking ASX shares have lost in the region of 30% and have been behind the big weakness in the market, having hit new lows every day. The bear factors stem from slowing economic growth and reduced profitability from official interest rate cuts, which they’ve been passing on, reducing their net interest margins. The stock market is factoring in more official interest rate cuts. Now the market is factoring in dividend cuts to these stocks. The key to remember is that bank balance sheets are in good shape due to regulatory decisions forcing them to increase the capital requirements for lending. The big risk for banks is anything that crimps margins on mortgage lending and we don’t see that as a factor. We’re doing a comprehensive bank report in this week’s Blue Chip Stock Report. Stay tuned and don’t panic.