Bargains to be had in the market too

While the instability of the global financial system suggested a weak end to the 2008 year, the seasonal odds certainly favoured a rally. In Australia during the last 24 years the Santa Claus rally failed to materialise twice; in 1990 and 1995.

Historically, with a Santa Claus rally in the markets, the average return over the last two weeks of December is usually 3.5%. If this rate of growth was to be sustained (it rarely is) throughout the year we would see an annual growth of 84% per annum.

While economies around the world certainly face challending conditions, the local stock market dropped more than 50% since its peak in late 2007. This drop occurred as investors sold shares in anticipation of sharp drops in earnings from the listed companies; however some companies continued to generate returns for their shre holders and are trading at a 50% discount or more to where they were a year ago.

But not all companies are cheap just because they have fallen in price. It is now time to get back to the fundamentals behind the business. Make sure you ask key questions such as:

• How does the company make its money?
• Is this sutainable with slower growth and lower consumer spending?
• How strong are the company’s margins?
• Can they survive on reduced margins for a period of time?
• How much debt does the company have?
• Is this debt due to be refinanced in the near future?

Companies directly reliant on consumer spending are likely to remain weak as consumers spend less on discretionary items and focus more on meeting their own immediate expenses.

Companies also at risk are those companies that have high debt levels.

- Sean Rothsey is executive chairman of the ASX listed diversified financial services company MDS Financial Group Ltd. (MSW:ASX). This information is collated from The Cube Financial Group PTY Ltd AFSL 232455 (“Cube Financial”) a subsidiary of MDS Financial Group Limited with the following disclaimer: Cube Financial has made every effort to ensure the reliability of the views and recommendations expressed in this material. The information presented by Cube Financial is based upon information known to us or information obtained from sources external to the company, which we believed to be accurate and reliable at the time of publication but we do not warrant its completeness or accuracy, or warrant any results from the use of this information. This information is prepared for the general information of traders and investors. The information does not take into consideration the specific needs, investment objectives or financial situations of any person. Any individual reading this should discuss, with their financial planner or advisor, the merits of any recommendation or offer presented in this material for their own specific circumstances and realise that not all investments are appropriate for every individual.

…download article here