Volatility is engulfing the Australian share market.
"Investors dump banks" goes The Australian Financial Review.
Suddenly, at 5,722 points, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) appears a world away from the illusive 6,000 mark.
However this kind of volatility can be good for investors, particularly those looking to buy or sell.
With shares of Medibank Private Ltd (ASX: MPL), Westpac Banking Corp (ASX: WBC) and Rio Tinto Limited (ASX: RIO) falling between 2.9% and 6.3% over the past three days alone, some shareholders may be asking themselves if now is a good time to take profits (or losses!) off the table.
Medibank Private Ltd
Shares in the hottest initial public offering (IPO) of 2014, Medibank Private, have come back to earth with a thud after soaring shortly after they first traded on the ASX. Indeed, those first few trading days resulted in healthy stag profits (a 'stag profit' is the immediate jump in shares following listing), but it now appears investor enthusiasm has turned, with shares underperforming the market by 14% in 2015. But despite trading for just $2.20 today, Medibank shares do not present as a bargain buying opportunity. Although they boast a 3.8% dividend yield, my advice to investors is to hold-off buying Medibank shares until shares trade considerably below $2.00.
Westpac
Westpac has risen strongly in the past 12 months and started 2015 with a bang – along with its big four bank counterparts. After almost going bust in 1991 the banking giant has risen strongly on the back of two decades of economic prosperity, increasing dividends and earnings per share along the way. Looking ahead however, forecasts for increased unemployment and slower economic growth don't appear quite so bright. In addition, given the cyclicality of bank profits, Westpac's shares appear priced for a 'perpetual goldilocks' economy according to some commentators – I concur. Indeed, I'd avoid buying Westpac shares at this time.
Rio Tinto
Shares of Australia's largest iron ore miner, Rio Tinto, have plummeted in recent times as the price of the steel-making ingredient nosedived. The sharp drop in the commodities price is a result of two important themes. The first is oversupply of iron ore (mostly from Australia and China); the second is slowing demand from China. Whilst Rio Tinto was the industry's lowest cost producer in 2014 and is unlikely to go bust under current market prices, the commodity accounts for over 45% of group revenue and around 90% of profit. Further spot price falls will squeeze Rio Tinto's profit margins and, ultimately, its share price.
Buy, hold, or sell?
If I held any of these shares, I'd perhaps look to take profits off the table. I already sold my shares in Medibank at $2.39 and continue to believe investors holding the stock over the next three to five years are unlikely to see it outperform the market. I'd rate it as a hold, at best.
The same goes for Westpac. Whilst it's not a bad business by any means, the external environment will make it more difficult for the bank's share price to outperform.
