It may be really tricky to invest in ASX shares during these uncertain times.
A share price is meant to represent the prospects of a business for the foreseeable future. Many share prices are riding high, yet there's still a lot of uncertainty. How are you meant to invest in this environment?
Reporting season is coming to an end and it has been quite illuminating.
There are plenty of businesses that you may not have thought that they'd do really well during a recession caused by a pandemic. But they are doing well.
ASX shares like Harvey Norman Holdings Limited (ASX: HVN), JB Hi-Fi Limited (ASX: JBH), Adairs Ltd (ASX: ADH) and Nick Scali Limited (ASX: NCK) all reported impressive second half results. These retailers are not exactly providing what you'd say are 'essential' products. The Australian consumer has been spending a lot of money over the past few months.
We can see that retail strength coming through in the performance of the buy now, pay later companies such as Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P). The valuations of Afterpay and Zip have gone sky high thanks international growth plans. Will they ever make a decent profit? Does it matter?
Returns are what matters
Ultimately, the most important thing that investors get judged on is returns.
It's the portfolios of holdings like Afterpay, Zip, Kogan.com Ltd (ASX: KGN), Pointsbet Holdings Ltd (ASX: PBH), Megaport Ltd (ASX: MP1) and Nextdc Ltd (ASX: NXT) that have delivered the strongest results over the past year.
If you owned those ASX shares then you'll have done really well with them. But those are past returns. Are they still good buys? Is it time to take profit off the table? Will cheaply priced shares finally outperform? These are impossible questions to answer because the future is unknowable. It's particularly difficult to predict right now because of the different outcomes that could happen.
Another four years of a Trump presidency looks very different to a Biden presidency. The world (and share market) could be very different if a safe and effective vaccine for COVID-19 is created compared to if a vaccine proves impossible to develop.
Investing in ASX shares should consider a range of potential outcomes. A share price shouldn't be priced as though only the best outcome is the only outcome that's certain.
Interest rates
Interest rates going down goes some way to justifying today's prices. Valuations are meant to be higher when interest rates are lower. Businesses that can create growth in a low growth world are going to be highly desirable.
The RBA interest rate is now just 0.25%, which is extremely low. Australia's central bank has commented several times that the interest rate isn't going to go negative like other central banks. The RBA has also said that the interest rate is going to stay low for a few years. That's helpful for valuations.
It may be a mistake to think that the interest rate will stay lower forever. But I can't see the RBA deciding to suddenly send the interest rate up quickly either – that would probably be bad for the economy. The RBA has been carefully trying to manage the economy for a number of years, I don't think it's suddenly going to throw caution to the wind.
So, what to do about investing in ASX shares?
Don't forget that some ASX shares are posting big numbers – investor excitement has been vindicated.
There's an interesting question about what will happen when government support like jobkeeper ends.
There are lots of things to be uncertain about. But share prices keep rising and you'd have missed out on a lot of gains if you stayed in cash. If you can find businesses that you think are good value then I think you just have to go for it. Businesses can keep growing even if there are negative things going on.
Investing is about the long-term, not just what happens in the next few months. I'm sure there will be some volatility when it comes to the US election. But I think there are opportunities. ASX shares like Citadel Group Ltd (ASX: CGL) and Pushpay Holdings Ltd (ASX: PPH) are businesses that I think have very compelling futures, even with what's going.
