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Why this could signal the start of 2014’s bull market

The ASX saw its worst fall in six months yesterday, losing 1.8%, dropping below the psychologically important, but otherwise irrelevant 5,100 mark.

Today is not looking much better either — after a promising early start, the ASX has again gone into reverse in morning trade, dragged down by the banks, BHP Billiton  (ASX: BHP) and Wesfarmers (ASX: WES).

Never fear, Foolish readers.

As you’ll read a little further down, a lower market now means the bounce back, coming some time in 2014, according to one prominent fund manager, could be even more pronounced.

Since the start of the year, the S&P/ASX 200 has fallen more than $84 billion, losing over 5%, according to data from Capital IQ.

It’s what happens when, as Perpetual head of investment research Matthew Sherwood told Fairfax Media…

“Markets were priced for perfection and things don’t go perfectly when central banks start removing stimulus.”

I’m up 16% so far in 2014… and it might be only just the beginning

Despite the market’s sticky start to 2014, as if to prove it IS possible for individual stocks to rise in a down market, one of Motley Fool Share Advisor’s recommended stocks has climbed 20% so far this year.

Not only that, Sirtex Medical (ASX: SRX) is up a whopping 124% since we recommended it to our Motley Fool Share Advisor members in April 2012.

I can’t quite claim the same gains yet from my holding in LifeHealthcare Group (ASX: LHC) — the dirt cheap IPO I mentioned in Motley Fool Take Stock last month —  but I am off to a good start, the stock up 16% so far in 2014.

2014’s bull market  — starting soon

If those sorts of gains can be made in this down market… well let me just say, I’m excited about what could happen to stocks should the market regain its mojo.

And if Platypus Asset Management’s Donald Williams is right, it could be a case of look out above!

Mr Williams recently described his outlook for Australian equities as ‘bullish’, telling the Australian Financial Review…

“At some point in 2014, the Australian market will start to outperform the US market, which will be the beginning of a very interesting period for the market.”

Interesting indeed.

In June 2013, Mr Williams correctly predicted that the market would rise, after steady market falls… all of which could bode well for his latest outlook.

Platypus recently added to its positions in two recent IPOs — education and training group Vocation Limited (ASX: VET) and travel insurance provider Cover-More Group (ASX: CVO).

I’ll be taking a closer look at those two stocks in the coming weeks. Watch this space…

Rates on hold… but not according to the Oldies

Yesterday the Reserve Bank held the official cash rate at 2.5%.

While the central bank dropped its easing bias — meaning no more rate cuts – it did say that its sees rates on hold for an extended period of time.

I’m not convinced, and I’m not alone…

Three of Australia’s leading economists, with 100 years of experience between them — Westpac’s Bill Evans, NAB’s Alan Oster and Bank of America Merrill Lynch’s Saul Eslake  — are still predicting the central bank will be forced to cut rates, according to Bloomberg.

Rising unemployment and the end of the mining boom will drive the cash-rate lower they say.

Not one to sit on the fence, Bill Evans has told Bloomberg he is still predicting two rate cuts in the second half of this year.

Look out below, term deposit holders. The ultra-low interest rates are one reason why I’m staying fully invested this year.

Given the low interest rate environment, against all the odds, Australia’s house prices could be set to continue their rise and rise.

Here’s one way you can play that theme…

A punt on the Aussie housing market

REA Group (ASX: REA), the owner of Australia’s largest property portal realestate.com.au, has continued to deliver outstanding results.

Yesterday, in a tough market, REA shares went against the trend, rising an impressive 5%.

Revenues rose 30% in the first half of 2014, with net profit up 37%. Despite its market dominance in Australia, the company still managed to deliver 30% growth locally.

There’s a sign of the red hot property market for you.

Rising house prices

Source: Motley Fool

Overseas businesses currently contribute 10% of revenues, with sites in Luxembourg, Italy and Hong Kong, but that is increasing rapidly as REA picks up smaller competitors in those markets and extends its dominance.

Now I admit REA doesn’t look cheap trading on a trailing P/E ratio of 53.

It means investors are happy to wait more than half a century to make their money back, if earnings stayed flat in the future.

That won’t happen of course and the share price and earnings will swing about. The problem for investors is not a lot needs to go wrong to see the market lop 50% off the share price, and bring it back to a more respectable P/E ratio of 25.

I asked Motley Fool Share Advisor stock picker Scott Phillips for his view on REA Group…

“It’s a top quality business with one of the best moats in Australia… but valuation still matters, and today’s price means the company is priced for perfection in an Australian market it already dominates.

If it can successfully continue expanding overseas and raise its revenues in Australia, today’s price might be reasonable. But those are a couple of big ‘ifs’ and we don’t think the odds are in our favour… just yet.”

REA’s not for me either, at this price.

Instead, I’ve got my eye on a lumbering $8.5 billion company, with one of the best brands on the planet.

Coke is it, and hitting 2-year lows

Its share price recently hit 52 week lows, and it’s the cheapest it has been since January 2012.

Still, the company has never been cheap, and still trades on a trailing P/E ratio of 20.

Warren Buffett is widely regarded to have learnt from his long-time investing partner Charlie Munger that, ‘You have to pay up for quality.’

Coca-Cola Amatil (CCA) is one of those quality stocks that investors would love to pick up on the cheap.

Its recent re-entry into the Australian beer market could be the start of something wonderful, and offset some of the issues CCA is having with a price discounting war on soft drinks in Australia, and the ongoing drama over SPC Ardmona.

Indonesia — Coke’s big growth opportunity

Coke’s strong growth in another of its key growth markets, Indonesia, may well depend on the number of fridges in the country.

According to a business expert on Sky Business, keeping cans of Coke, Fanta and Sprite cold could see sales take off in a country where sales on a per-capita basis lags behind its neighbouring South-East Asian countries.

Cokes grew earnings in Indonesia by 15% in 2013 but that growth rate still managed to disappoint the market.

With shares trading at around 2 year lows, I’ve got my eyes on Coca-Cola Amatil and may well pick up some more shares for my SMSF.

In this ultra-low interest rate environment, the 4.9% dividend yield (75% franked) is the extra added fizz on top.

I’ll be eagerly awaiting the company’s full year 2013 results on February 18.

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Motley Fool writer/analyst Mike King owns shares in Coca-Cola Amatil and LifeHealthcare Group. You can follow Mike on Twitter @TMFKinga

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