Since reaching a high of 5982 points in April, the ASX has fallen by 15%. That's not enough to put it in bear market territory but, from its current level of 5071, a fall of just 5.6% (or 285 points) would be sufficient for this to happen.
Clearly, defining a bear market as a fall of 20% from a previous high is a rather simplistic means of analysis. After all, a fall of 19.9% would not be considered a bear market, while a further nudge downwards would be. As such, the definition is somewhat unhelpful.
However, the 15% fall in the value of the ASX in less than five months indicates that investor sentiment has fundamentally changed. As such, in the near term there could be further falls in the value of the index – especially if Chinese growth prospects remain uncertain and commodity prices come under further pressure.
This, then, appears to be a sound moment for value investors to come out of the woodwork and begin to shop around for high quality stocks that are trading at appealing prices. Furthermore, because such investors are not concerned with short term performance, they will not be upset if paper losses occur in the months ahead – so long as in the years ahead they generate a great total return.
One stock that appears to be capable of that is Newcrest Mining Limited (ASX: NCM). It is a gold mining company and, as a result, could be an effective hedge against further turmoil in the global economy. That's because, while gold is at a five-year low, the precious metal tends to rise in value during periods of uncertainty, with investors flocking to it as a store of value. As such, Newcrest Mining may receive a boost from a higher gold price over the medium term if, as expected, the outlook for global growth disappoints.
Furthermore, Newcrest Mining has made sweeping changes to its business in recent years, with cost cuts and efficiencies helping to push its cost curve lower. This will aid earnings in future and, with the company trading on a price to earnings growth (PEG) ratio of 1, it appears to offer growth at a very reasonable price.
Likewise, specialist lender, FlexiGroup Limited (ASX: FXL), also offers excellent value for money, with it having a price to earnings (P/E) ratio of just 8.4. Certainly, doubts surrounding the Aussie economy and the potential for a recession could hurt investor sentiment in FlexiGroup moving forward but, realistically, such a wide margin of safety for a business that remains highly profitable seems hard to justify.
Furthermore, with FlexiGroup yielding 7.2% at the present time, it offers a far superior yield to the ASX, which yields 4.9%. And, with a beta of 1.55, it could be a superb comeback stock once the ASX recovers over the medium to long term.
Clearly, the insurance sector is becoming more competitive and, at least partly due to this, the financial performance of Insurance Australia Group Ltd (ASX: IAG) is due to disappoint over the next couple of years. In fact, its profit is expected to flat line next year after a rise of just under 7% this year, which may not be enough to positively catalyse investor sentiment.
However, IAG's yield is likely to make its shares more in-demand – especially if interest rates move lower in response to disappointing Aussie economic data. That's because IAG yields a fully franked 5.9% and, with it having increased dividends per share by 17.4% per annum during the last five years, it appears to be a high-yield, high dividend growth stock for the long term.
