Alan Clarke: Take profits and keep diversified

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New Zealand shares are up more than 50 per cent on the past three years. Global hedged shares are up over 50 per cent over the past three years (in $NZ terms). Can they go any higher?

NZ SHARES

Prices for our dairy exports are down 36 per cent so far - is that the bottom, or could it fall further?

Log prices are down 30 per cent too - is that the bottom?

These are our two biggest exports, so such a fall has to affect New Zealand share prices, one way or another.

Have you got a strategy for taking profits from your shares? If not, here is a simple one. Adjust your assets so you hold say 50 per cent bonds, and 50 per cent shares.

Keep rebalancing - always maintain 48 per cent to 52 per cent bonds and 48 per cent to 52 per cent shares.

Note I have left out property since most Kiwis have heaps of it already.

GLOBAL SHARES

Pretty high too, so should we worry, or are we in for a longer-than-normal strong run?

NO GLOBAL RECESSION IN SIGHT

Really bad markets often occur around the same time as severe economic downturns, such as the 2008 to 2009 GFC, the 2001 dotcom meltdown and the 1972 oil crisis.

A US market strategist said there are five indicators (a mix of jobs, housing, manufacturing, inflation and market data) that tend to go down right before a recession. None of them in the US is currently falling.

THE FED IS HOLDING INTEREST RATES LOW

The US Federal Reserve is painfully aware that things are still fragile, so they won't do anything that could upset the US economy or the stock market. The Fed will probably start raising rates in 2015 so they might go from near zero to 1 per cent next year - pretty minimal.

INVESTORS ARE STILL TWITCHY

US markets recently hit an all-time high, but investors have not forgotten 2009, and they worry about the Ukraine, and even more about the Middle East.

CNN's "Fear & Greed" Index was in extreme greed a month ago but is now back to moderate fear.

STOCKS ARE NOT CHEAP BUT NOT MADLY OVERVALUED EITHER

Stocks are not bargains with the S&P 500 is trading at 15x 2015 price-to-earnings (PE) estimates - roughly in line with fair or full value for the market.

Predictions in the US are for earnings-per-share growth of 12 per cent in 2015. Some analysts believe a total return for the market should roughly correspond with earnings growth and income from dividends (in this case, 14 per cent). On that basis, a PE ration of 15 is not too expensive.

1000 DAYS WITH NO DOWNTURNS?

The doomsayers argue that there hasn't been a big pullback for 1000 days. It does feel like the market has done nothing but go up, up, and away; however, a closer look shows there have been several corrections over the past five years.

The markets have gone down twice since 2010 over fears about Greece. It also got upset over the US debt ceiling concerns - when the US politicians could not agree on government borrowings until after the last minute.

There have been corrections to this bull run and there will probably be more.

SUMMARY

There are no sign of the indicators that usually upset markets. The global economy is still recovering from the GFC, and is certainly not at the "high end of a boom".

House prices in some countries are too high and politicians are taking action rather than just talking. They know how disastrous a GFC can be and are determined to try and prevent another one.

RISKSAll the usual - unexpected wars, economic folly somewhere, the power hungry like Putin causing trouble and so on.

One hopes the West is smart enough to keep out of it as much as possible, and so prevent a spreading conflict.

The US will be self-sufficient in energy by 2020, if it is not already. They keep finding cheap gas, too.

STRATEGY

Do not hold big positions in shares that have risen. Do not hold a lot in NZ shares as you cannot get enough diversification here - say maximum 10 per cent in NZ shares. Take profits. If your strategy is to hold 50 per cent in shares, do not hold 54 per cent - get back to 50 per cent, or maybe 45 per cent to 48 per cent while markets are high.

Once you have set your strategy, don't be in a hurry to change it.