KEY POINTS:
It takes nerves of steel to plunge into the equity markets when it's not yet clear whether the depths have been plumbed.
No one is 100 per cent certain that we're not just in the eye of the storm.
Thanks to catastrophic collapses in many share prices many equities are trading at affordable prices once again that bear some resemblance to their fundamentals - although there is an argument that pre-bubble prices were inflated and we're now seeing sensible but not bargain prices.
Famed investor Warren Buffett has been buying for a number of weeks now. Other pundits are emerging from their bunkers with the word "buy" rolling off their tongues with more ease than it has for months.
Here in New Zealand prices are looking cheap - if you ascribe to the argument that actions by governments globally have brought the worst of the credit crunch to heel.
Forsyth Barr's Rob Mercer estimates that the NZX is trading at a 30 per cent discount, compared to an average for the past five years of 8.5 per cent.
Michelle Perkins, research analyst at ABN Amro Craigs, adds that the P/E of the New Zealand market has come back to a point where equities are "starting to look fair value or reasonable value".
There are opportunities in the market, says Perkins. They include defensive blue chips including:
* Port of Tauranga, which could be boosted further if a tie up with Auckland Airport goes ahead.
* Fletcher Building, although hit by the residential downturn is "full steam ahead" on infrastructure.
* Contact Energy, which at the $7.20 level it was this week, is good value.
Likewise Mercer says many of the larger blue chip stocks have been oversold, yet have relatively strong balance sheets. His picks include SkyCity, Sky TV and Fletcher Building.
"We see value in a large number of stocks," adds Mercer. "We have almost 85 per cent of stocks trading on more than 15 per cent discount. That is unusual."
Yet earnings for 2009 have already been downgraded by more than 25 per cent. Other stocks favoured by Forsyth Barr include Kiwi Income Property and other stocks with premium property portfolios, and Guinness Peat, in part because it is debt-free.
AMP head of equities Guy Elliffe says AMP Capital Investors is wary of stocks with large debt. He favours exporters that will benefit from the weakened dollar and those with overseas assets. Although currently underweight in cyclical stocks, AMP Capital Investors is buying them on "bad days" in the market.
If they're beaten and battered on the outside, but provide value on the inside, then the answer is yes. If they're battered and face an uncertain future, such as the case of consumer stocks, they may not be a good buy.
Elliffe says he can understand why many private investors have taken flight to low-risk investments - especially those covered by the government guarantee.
Although many professionals see value, there is still a huge amount of uncertainty about how long and deep the recession will be. No one can say that we've hit rock bottom and not just experienced a dead cat bounce.
Most commentators believe that the volatility isn't over yet and will continue into the New Year, which is one of the reasons why stocks are trading at a discount.
But the reality is that the markets will recover at some point and those that got in early will be grateful. Those who are nervous need to be selective and build a portfolio slowly. It's not necessary to pick the exact bottom of the market, with dollar cost averaging - or drip-feeding money into investments - one strategy.
If the market keeps going down and you're investing regularly you will pick up some bottom-of-the-market buys. Dollar cost averaging also smoothes out the volatility.
Stocks that won't shock Perkins says it will be hard for many small investors to dip their toes into the water, but increasingly stocks are looking appealing. Those small investors might want to choose blue chip defensive stocks, which provide relative safety, she says. This isn't a time to be taking a gamble on small, relatively unknown companies if you're a conservative investor.
The word "relative" is an important one as even the experts didn't predict the downfall of companies such as Lehman Brothers and HBOS (Halifax Bank of Scotland) in the recent market turmoil.
Overseas markets In uncertain times investors sometimes lean towards the devil they know and may prefer to buy New Zealand equities. But that is the wrong approach, says Diversified Investment Strategies' Norm Stacey. "We broadly favour offshore - more so in the current market."
Elliffe, too, says that although New Zealand stocks are cheap compared to the levels they've traded at in recent years, they are not relative to global markets.
Stacey's favoured regions are the US, China and emerging markets and Japan - if there is a currency reversal as expected.
"The US is most advanced in [its] monetary and fiscal stimulus - having poured a lot of money into the markets. The economic uncertainty has pretty well dissipated." He points out that the banking sector, despite the headlines, actually hit bottom in July and has been in recovery since then.
China should be of particular interest to investors, says Stacey, because share prices have been knocked down by recent events, but the downward adjustment of economic growth has been more modest, meaning stocks could be undervalued.
ABN Amro Craigs is also recommending the US - especially defensive stocks such as Proctor & Gamble, which "provides goods people need", says Perkins, and distributes into emerging markets. Others include Johnson & Johnson. In the UK, the stockbroker was recommending Vodafone and Tesco.
Perkins was more wary of Japan - although her company does have an allocation, but uses exchange-traded funds and investment trusts rather than attempting stock picking, which is very difficult in that country.
Rules for unstable times Private investors need to put rules in place if they are to buy in volatile markets. They include, says Perkins, choosing companies:
* Whose business you understand.
* With strong balance sheets.
* With manageable levels of debt.
* With dividend cover.
In such uncertain times, says Stacey, you need "circuit breakers" in place. should the markets take serious turns. "We don't usually buy or sell on limit orders.
But several times in the last month we have had calls from brokers asking us if we wanted to persist. We like to buy and sell at prices that are proximal to what they were when the order was placed."
