Today, the S&P/ASX 200 Index (ASX: XJO) is again moving higher, up 1.1% at the time of writing to 5,835.8 points. It could be, that after weeks of flatlining, this ASX 200 bull market is now set to break the psychologically important 6,000-point barrier. If it succeeds in doing so, it will be for the first time since early March.
What an incredible run this has been too. Since 23 March, the ASX 200 has now rallied over 28%.
But one ASX fund manager isn't too keen on piling into this ASX 200 bull market. On the contrary, Scott Haslem of Crestone Wealth Management is starting to see some stretched valuations in the market. This is something that doesn't herald good times ahead.
According to reporting in today's Australian Financial Review (AFR), Mr Haslem is 'holding back' from chasing this bull market for 2 reasons.
Confessions of a nervous ASX fundie
Firstly, he believes valuations are starting to get ahead of themselves.
"The rally is a rational response to the improving economic backdrop", the AFR quotes Haslem as stating. "The issue is what price you want to pay for that rationality."
Of course, the unprecedented monetary policy that governments around the world are executing, including both here and in the United States, makes it difficult to say that shares are overvalued per se. But a 30% rally in just over 2 months is definitely worth examining.
Secondly, Haslem is worried markets haven't fully priced in the earnings hit that coronavirus is yet to unload on the ASX. Companies across the board have had to increase their costs dramatically in order to implement social distancing rules. This is almost certain to impact their profitability and, therefore, their share prices.
"The likely persistence of social distancing – and rightly so – is likely to slow the revenue of these companies," Haslem stated. "And then other behaviours are going to have to change to adjust to the new environment, and that's going to add additional cost to doing business…" He went on to say "Boards and companies are going to have to be looking for multiple supply chains for each component, and that's going to add to costs."
Haslem is worried about companies getting hit with a 'double whammy'. Not only are revenues likely to be subdued for some time among many ASX businesses, but these new costs are likely to be semi-permanent. These means a continuation of burning the earnings candle at both ends.
Should ASX investors be worried?
I think Mr Haslem makes some good points here. There's no doubt now that this ASX 200 bull market is pricing in a strong and rapid recovery for our economy, as well as arguably for the global economy.
That leaves very little wiggle room on share pricing if things don't pan out that way.
But does this mean we should sell out of all shares? No, not in my view anyway.
I think the best course of action an ASX investor can take today is to reassess their portfolio. Make sure it consists only of companies you have long-term faith in. Additionally, making sure there's a significant cash position available to take advantage of any future market downturns is also important. This can provide you with peace of mind if another crash does come, as well as some firepower to take advantage of lower share prices.
