Not scared by bears: Why the ASX share market could be poised to skyrocket

The S&P/ASX 200 Index (ASX: XJO) has gained more than 20% after current bear market lows were reached on 23 March. This turnaround is thanks in part to the slowdown in new COVID-19 cases, China slowly clawing its way out of the corona slump, and fund managers increasing their stake in undervalued companies like Flight Centre Travel Group Ltd (ASX: FLT).

But while markets appear bullish, the fun ain't over.

Here's what 3 industry experts have to say about what could be in store for the ASX going forward, and how to approach investing in a volatile market. 

Bottoms up

Wise investors understand we won't know we've hit the bottom of the market until we see it in the rear view mirror.

"We're not out of the woods. Volatility will drop when new COVID-19 cases stop, business returns to normal and retail, hospitality, tourism, sport and property services are up and running," says Bell Direct market analyst Jessica Amir, who recommends focusing on companies to buy and hold.

"This is an opportunity to set yourself up with a diversified investment portfolio," says Amir.

Pat Garrett, CEO and co-founder of robo adviser Six Park, expects tensions between the medical and corporate worlds will drive markets in the near term.

"The former sees major benefits in leaving lockdown measures in place and the latter wants the fastest route back to business as usual. Where action and policy land across this spectrum is likely to be the largest driver of share markets.

"So, we remain in a situation where sentiment not data is driving the market. Investors need to know what policies will be adopted and what containment data says about COVID-19's impact, which could take months to play out. We also need to understand potential downsides of US economic interventions. Expect more wild swings in coming weeks as it's going to take time to get stability on how to interpret data."

Garrett notes bear market rallies can make investors feel the bottom has come and gone when it hasn't.

"Rebounds, like falls, tend to be highly unpredictable. Market stability, even if that means new lows, will start to return when there is sufficient clarity to assess whether a short-term recession or a long-term depression is the most likely outcome. There simply isn't enough data yet to make that assessment. Typically, the bottom is when you least expect it."

Integral Private Wealth principal adviser and director Luke Ranson points out markets are reacting to government and central bank measures instead of fundamental data.

"In the US, the S&P500 is up 1.4% despite 6.6 million Americans applying for unemployment benefits. Locally, state and federal government announcements and the RBA's capital injections have driven market movements."

Ranson expects the prime minister's announcement about relaxing current restrictions and businesses reopening to provide near-term confidence, however cautions that "there's a lot of uncertainty, so don't expect a smooth recovery." 

But, with the ASX falling 36.5% between its February highs and end of March, it doesn't really matter if we've hit the bottom – there are a number of good buying opportunities right now.

"Some companies already represent good value. But steer clear of sectors that have been directly affected by COVID-19 such as accommodation and aviation. Instead, look for solid businesses with strong balance sheets," says Ranson.

Reporting season outlook

The market comprises 2 types of companies at the moment: those that have totally abandoned earnings forecasts and those whose forecasts have been maintained or improved.

"It's tough times for tourism companies and retailers without a strong online presence. But consumer staples, telcos, utilities and healthcare companies are doing well. Landlords and industrial companies that service those markets like Amcor and Brambles are also in this category," says Amir.

We're just starting to see US companies' earnings results, with Johnson & Johnson beating its forecast and JP Morgan and Wells Fargo disappointing the market. This gives local investors some insights into how the Aussie reporting season will play out in August.

Garrett says the global economy's frozen moment has in part already been priced into markets.

"Though the recent rebound suggests investors feel COVID-19's impact will be less than expected. But listen closely to what companies have to say about future guidance and expectations. The broader markets could test new lows if corporate guidance is fuzzy or alarming," he says.

Ranson comments that while there's a danger in investors expecting better results, as this could drive the next leg lower, "the amount of pessimism in the market may mean if companies announce stronger than expected results, it may provide a boost."

Results from the big four banks and other larger listed companies such as BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO), Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES) will have a big impact.

"Globally, I expect plenty of announcements about how companies are adapting their operating models to navigate this period. This might include suspending or cutting dividends or divesting certain parts of a business," says Ranson.

The Bank of Queensland Limited (ASX: BOQ), for example, announced last week that it wouldn't be paying its first-half dividend at its half-yearly results announcement. The bank's share price fell 5% on the news, ending the trading day 2.14% lower.

Says Ranson: "No matter how the upcoming reporting season goes, the current environment serves as a timely reminder to be diligent and have a strategy for building long-term wealth that withstands periods of volatility."

The cash risk

Investors require robust nerves to get into the market at the moment. But if you're not in the market now, you can't capitalise on gains as it recovers.

"That doesn't mean you have to go all-in," says Ranson. "You can slowly increase your exposure to the market over the coming months. Those with a more conservative risk appetite can achieve real growth in their wealth by being exposed to companies with strong balance sheets and revenue streams that are less affected by COVID-19."

Garrett notes being in cash also means not earning any income, even if dividends are reduced due to deteriorated economic conditions. "Reinvesting any dividends you do earn while share prices are depressed is a powerful way to ride out market downturns as it's a forced mechanism to buy low," he says.

Sitting on cash waiting for things to get better also typically means investors end up missing the early stage of the broader market recovery, which tends to be unpredictable and fast. "Whether that recovery is near term or long term is still incredibly hard to predict given the lack of data needed to make such an assessment," adds Garrett.

Says Amir: "It's important for investors not to try to time the market. Reflecting on the last bear market in 2008, 50% was lost from late 2007 to early 2009. If you sold out during that time, you missed out on a 59% rebound over the next year. Investors will return to the share market as there's no alternative that offers such attractive returns. It's difficult to predict when the market will fully recover, but we know it will happen."

Foolish takeaway

Here are 4 key takeaways for ASX investors:

• Don't wait until it's too late and the market has turned to take advantage of a once-in-a-decade share market rout.
• Now's the time to add really cheap blue chip stocks to your portfolio – or create a diversified basket of shares – while the market is on sale.
• Avoid sectors that are feeling the COVID-19 pinch like tourism and hospitality.
• Get into companies that are benefitting from the pandemic like health and supermarkets.

Motley Fool contributor Alexandra Cain owns shares of BHP Group Ltd and Woolworths Group Ltd. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.