You might be wondering what you should do amid so much global market volatility and uncertainty. As we have pointed out consistently, significant risks remain around the world particularly in the bond market; markets such as commodities and oil are in meltdown; and markets remain at the whim of Central Banks.
The good news is if you take an international perspective there are stocks that have dominant market positions, are growing by disrupting existing markets and are also offering good value.
Market capitulations
There is no doubt the global macro outlook is dramatic and almost unprecedented in its uncertainty.
We have already witnessed a crash in commodity prices, such as iron ore; then late last year oil capitulated, seemingly out of nowhere.
The oil slump benefits consumers with cheaper fuel; but it is ominous for European growth: the crash occurred in the midst of a European winter, a usual time for peak demand.
Oil price
Figure 1. Oil price chart
Weak oil could also trigger geopolitical risks as it destabilises major oil producers such as Russia, the Middle East and South America.
Could bonds correct?
We have also consistently been pointing out the risk of a major bond market correction.
The prospect of Quantitative Easing in Europe, particularly, has crunched bond yields there in countries such as Italy, Ireland, France and Spain. A correction is likely in Europe at some point and most likely when growth and/or inflation returns there.
The European Central Bank is trying to stimulate growth through Quantitative Easing; and the imminent announcement could trigger some short-term reaction.
But over the medium and longer-term we don’t believe it will stimulate economic growth. Any positive impact for Europe will be through a depreciation of its currency, the euro, which makes Europe’s exports cheaper. The euro has already slumped around 20 per cent against the $US in the past six months. Further, we expect that QE will be matched with an end to austerity with European governments encouraged to lift their deficits.
A currency war
But further euro falls could exacerbate a ‘currency war’ between the US, China and Europe as policy makers seek to devalue their own currencies to make their exports more attractive.
The global uncertainty, of course, is flowing through to Australia. Investors in the likes of Japan and China see us as a relative safe haven; though our bonds yields are at record lows, they’re also a good relative bet.
That inflow of capital is propping up the $A; yes it’s fallen, but we think it needs to fall further (to around US70c) to stimulate key export sectors such as tourism and help rebalance the economy away from the waning mining sector.
What should you do?
Amid this uncertainty, you’re right to ask: what to do?
Domestically, we continue to recommend investors keep focussing on yield stocks such as Telstra and the big banks at the right price. You should also maintain some cash, despite low yields, to re-enter the markets should one of these global risks cause a shock and steep correction.

But for investors willing to take a global perspective, there are attractive stocks on offer.
One stock that we believe is worth a look is search engine powerhouse Google, which combines a dominant market position and growth opportunities through new markets and disruption, with an attractive valuation.
We think Google has the power to ride out this global uncertainty through domination and innovation.
Google, of course, is a household name; it has a commanding lead in internet search with a 65% share of the global market.
That share gives it a strong business and financial base. The company monetises its free search service with Google Adwords (the small ads that appear at the top and to the right of its search results).
Google share price
Figure 2. Google share price
Source. Google Finance
That existing business has significant growth opportunities: as the number of web pages increase, Google is likely to attract more searches and hence be able to sell more advertising. More advertisers are also warming to the concept of online advertising, and an increasing portion of advertising budgets is likely to be directed online, with Google in the box seat to get its share.
But Google also hasn’t stood still; it is a relentless innovator. It has developed the likes of Gmail, Google Earth and Google Maps. They were virtually unheard of 15 years ago, yet they now provide another plot of important online real estate in which we can be advertised to.
We believe Google’s development is akin to a number of ‘out of the money options’: much of it will amount to nothing, but it is likely that something will work with a large payoff.
Perhaps the more intelligent question to answer is what could go wrong for Google, rather than what could go right.
In order to provide search to the world, Google has invested over $US29 billion in its infrastructure to store and process the world’s information. Its index of the web contains many billions of webpages created by over 1m computing hours; think 10 super computers working around the clock for 11.4 years. And its algorithm is a stroke of genius that has taken years to refine and continually improves.
Competing with Google would require a substantial investment of capital, time and intellectual property which lies far outside the capability of most, which renders the future bright.
Google also has the scale and power to grow businesses through joint ventures: it can cozy up to anyone it wants.
At $US506.9 We have Google trading slightly ahead of its $US482.31 value. This presents as a ‘great company at a fair price’ type of situation. Over 15 per cent of Google’s market cap is represented by net cash. On an ex cash basis, Google is trading on slightly over 17x FY15 consensus earnings. Given the company’s growth profile and resilience, this is pretty reasonable.
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