There has been elevated volatility on the ASX share market since the start of 2022. There is a lot of market focus on the high rate of inflation and how central banks are responding with interest rates to bring it under control.
Higher interest rates are theoretically meant to pull down on asset prices. Why? Let's look at some wisdom that Warren Buffett once shared with the world at an annual general meeting:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature… its intrinsic valuation is 100% sensitive to interest rates.
With interest rates rapidly climbing in both the United States and Australia, perhaps it's not surprising that markets are seeing volatility as asset valuations are disrupted.
Time to buy ASX shares?
Every expert may have an opinion on that question.
A share market is made up of individual businesses. And each business may or may not be at a good price.
However, some experts have made some comments about whether they think the share market is worth looking at yet. While the comments are focused on the US share market, investors may find them applicable to the ASX as well.
Mark Newton from Fundstrat Global thinks the worst of the falls could be nearing. The Australian Financial Review (AFR) quoted him:
Evidence of bearishness turning to capitulation has been growing, and I'm confident that markets are nearing a bottoming process which should be in place by the end of June.
However, Newton pointed out that downward earnings revisions are starting to "just begin to ramp up".
Warren Pies from 3Fourteen Research thinks that it could be time to start dipping a toe into the investing water:
Based on a model of forward price/earnings (P/E) ratios and interest rates, the stock market is undervalued by about 10% at present. Historically, bear market bottoms occur when this discount moves to between 15% and 20%.
During a big sell-off, we find ourselves – like most investors – a bit paralysed. Pulling the trigger is difficult. It's always darkest before the dawn, and every 20 per cent sell-off feels like it could go another 20 per cent.
In hindsight, it's easy to see the signs of a low – cheap valuations, washed out sentiment and policy support define most bottoms. Yet, trading bear markets is easy in theory but difficult in practice.
Which ASX shares to target?
There are plenty of quality ASX shares that have been sold down that I personally think could now be opportunities.
The shares I would be targeting are Washington H. Soul Pattinson and Co Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Australian Ethical Investment Limited (ASX: AEF), Betashares Nasdaq 100 ETF (ASX: NDQ) and Xero Limited (ASX: XRO).
