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Australian Equity Outlook – Are the Bulls officially back?

 There is no question that the start of the year has brought with it, a renewed sentiment toward the stock market. The bulls are back!! As discussed over previous weeks, falling cash rates have no doubt prompted investors to seek returns elsewhere – the market being a logical place.

However, this isn’t simply a New Year phenomenon. The Australian Equity markets have risen by more than 19% since June last year. A recent survey of fund managers also showed an increased weighting toward the stock market too, underpinning this move up.

So what about further growth for the Australian Equity Markets?

Looking at some of the benchmark stocks we follow, Wesfarmers (owner of Coles, Bunnings, Kmart et al) reported stronger customer levels over the Christmas period. In its announcement today, sales for the 6 months to December, were up 4.7% on last year with similar gains in liquor sales too. Bunnings also posted similar gains in sales over this time frame. Any revisions up of last years’ downgrades are likely to provide a boost to stock price performance.

The point is the market is moving up, and offering the potential for solid returns for those with exposure – and zilch for those without. Harsh but true fact.

A re-rating by analysts on any upgrade or revised expectation of earnings will likely provide a further push higher for stocks. In the meantime, we are reloading our positions following this month’s options expiry. One stock I have been following personally is Fortescue (FMG). With the recovery in iron ore prices over the past 2 months, and suggestions that the company’s debt structure has had work done, it provides a lower cost exposure to iron ore than its diversified neighbours – behemoths RIO and BHP.

As an aside, this is a stock that can be volatile – but the flip side or reward is higher call option premium, and this is one of the great things about Covered Calls as a strategy. While at its core, Cover Calls are a relatively low risk strategy, the investor can dial up or down, the amount of risk they are prepared to take on through the underlying security selection – enabling you the flexibility for more aggressive returns, within a broadly risk managed framework.

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