Cash is king for now, according to Australian fund managers, who say stock buying opportunities will abound once the battered Australian market dives into official bear territory.
Wilson Asset Management investment analyst Martin Hickson, Beulah Capital chief investment officer Peter Mavromatis, Peak Asset Management executive director Niv Dagan and Prime Value Asset Management co-chief investment officer ST Wong all say they have moved heavily into cash in recent months.
Australia's sovereign wealth fund, the Future Fund, also revealed on Wednesday that it had moved an extra $5 billion into cash since its March update. Cash now makes up 20 per cent of the portfolio, double the proportion of this time last year.
With the S&P/ASX200 on Wednesday creeping up 0.1 per per cent to 5090, the index is still only off about 15 per cent since its year-to-date peak of 5982 at the end of April. Bear markets are normally defined by a 20 per cent slide from the most recent peak.
A further 5 per cent fall is well inside the capabilities of the local equity market – it dropped by 4 per cent in a single day last week.
"The average bull market runs for 55 months," said Wilson's Martin Hickson.
"We're 77 months into the current bull market, the third longest in history," he said.
"We don't think there's going to be 50 per cent market falls from here, but we expect volatility to remain."
"In the recent sell-off we were selectively adding to positions and when the market bounced back at the end of last week we were increasing our cash weightings," he said.
Peak's Niv Dagan, meanwhile, has lifted his cash holdings to as much as 40 per cent of the total.
"We are waiting for some stability, and expect that to take place in the next two to three weeks," he said.
Similarly, Beulah's Peter Mavromatis has used recent sharp falls to selectively add to positions after building a cash pile at the frothy peak.
"When the markets were quite elevated we increased our cash levels to the fullest amount that our mandate would allow," he said, "so we've had a cash buffer as the market has fallen."
"It means we've kept our powder dry and we've started to deploy some of those funds at targets."
These targets include US dollar-earning companies – a play on the weakening Australian dollar – and undervalued stocks that are nonetheless benefiting from the drivers of domestic economic growth.
"We purchased JB Hi-Fi when it was still cum-dividend, which happened to coincide with a strong market fall," said Mr Mavromatis.
"We think discretionary consumer spending has been a steady contributor to domestic growth, and we think that's going to continue."
Household spending, although still sluggish by historical measures, was one of the bright spots of Wednesday's second-quarter national accounts.
Most fund managers are also keeping a wary eye on Chinese market gyrations and the country's macro-economic data, along with oil and other key commodities. The US Federal Reserve, which could soon start lifting interest rates for the first time in almost a decade, also weighs on stock selection.
All these global factors, in turn, can steer the Australian dollar's movements. The Aussie on Wednesday dropped below US70¢ for the first time since April 2009.
Prime Value's ST Wong agrees that the Australian dollar is one guide to when and what to buy.
"The fundamental point we would make is the markets over the past five years have really been held up to a large extent by the weight of liquidity in the markets – what we would be looking for is a reversal of that," he said.
"The transmission does affect the forex market first at the early stage; that's somewhere we would be looking to as an indicator of where sentiment lied."
