What the Australian share market has in
common with three-minute noodles
ST Wong, Prime Value Asset Management
20 October 2021
The Australian stock market has developed a hunger for any next thing, it doesn't even need to be a 'next big thing', just any next thing to fulfil a short-term craving.
The market's short-term focus is like basing a diet around three-minute noodles. Three-minute noodles are convenient, they do the job to satisfy your hunger temporarily, but they lack the nutritional make-up to sustain you long-term.
The craving for short-term news is creating good opportunities for stock pickers who take a longer term view.
For example, the immediate reaction to Australia's borders closing, or re-opening, sees a quick-fire reaction to travel-related stocks such as Flight Centre or Webjet.
Lockdowns have also hampered stocks connected with residential property, due to impacts on short-term listings: REA's share price fell 10 per cent after reporting due largely to ongoing lockdowns.
Investors are assuming REA will be a COVID loser, but this is a short-term view. Real estate prices globally remain buoyant and interest rates low.
A longer term view suggests REA has a superior real estate listing portal that has become indispensable for property buyers and sellers alike. And it has pricing power. REA is well positioned to continue improving its incremental returns on capital through higher prices.
While short-term success fills a craving, investors need companies which sustain over the long-term. There are good opportunities for stock pickers by targeting those companies which have enhanced their position during COVID-19.
Several quality Australian companies have improved their financial position and are poised to do well as the economy recovers.
For example, regional airline Alliance Aviation has shown the foresight to pick up assets on the cheap, and enhance their standing. At Prime Value, we expect these assets, acquired on depressed prices, to make very profitable returns once deployed.
Similarly, IDP Education recently acquired the British Council's Indian English language testing business for a great price, improving its position for long-term growth.
Looking past the three minutes noodle cravings takes patience and can test even professional investors. But the rewards are investment choices which are more sustainable and robust, less reactionary, and more resilient to market fluctuations - delivering better performance over time.
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