Morningstar senior equity analyst Brian Han’s recent report on the equity market provides a timely guide on how investors should approach the market in choppy times.

“Investing is hard. Being swayed by daily noise of the market makes it even harder,” Han writes in his report, The black art of ignoring white noise.

Han highlights headlines that scream “momentous” and “unprecedented” continue to dominate the financial news cycle.

He acknowledges that it has not been all that rosy on the market and economic front. Since the March quarter, global inflation has risen, amplified by the disruption of supply chains across the world. The March quarter of course was the beginning of seven rate hikes—and counting!

Despite the “angst” and “spilled ink”—Han highlights that the S&P/ASX 200 is down only 9 per cent year-to-date and merely 5 per cent below pre-COVID 19 levels.

“That may sound flippant to those nursing losses, until one realises the index is up 50 per cent from COVID-19 lows in March 2020 when the negative market noise was at its peak,” Han says.

Heeding the lessons

Han acknowledges that some investors may be feeling the impact of market losses more than others. Here investors are reminded of the timeless investing lessons of not picking the market and remaining diversified.

According to Han, if an investor has been holding (or punting on) former darlings in the now-maligned information technology sector, such as Novonix (NVX), and Xero (XRO) , the returns would have been dismal this year. On the other hand, if an investor has been loading up on oil and gas and coal stocks in the “suddenly fashionable energy sector”, such as Woodside Energy (WDS) and  New Hope (NHC) they would be thinking “what bear market?

“Assuming a well-diversified portfolio, ignoring market noise and staying invested, especially in periods of nervousness has historically proven a sound long-term strategy,” Han says.

“Trying to pick market tops and bottoms can be fraught with risk and is exceptionally difficult to do.”

On Han’s assessment the S&P/ASX 200 has returned 4.7 per cent in compound annual return since June 1992.

“Critically, the periodical downturns along the way have been the opportunistic troughs that long term, patient investors have taken advantage of, adding to the magic of compounding.”

Indeed this lesson about being a patient investor and waiting for the opportunities were also echoed by AMP chief economist Shane Oliver as well as Morningstar’s very own Mark Lamonica in his recent Editor’s note, A murky future.  

Where are the opportunities?

Morningstar’s latest quarterly outlook report already highlights some undervalued stock opportunities, most notably in the energy sector.

Han’s assessment uncovers other opportunities including the Australia and New Zealand Banking (ANZ) Group and Westpac (WBC). “These two big banks also remain cheap relative to our intrinsic assessments, despite the financial sector’s resilient market performance so far this year.”

There is even opportunity to be found in the unloved sectors, most notably those tech stocks who appear to have been oversold relative to Morningstar’s fair value estimate.

“The lack of love from investors often provides the most compelling long-term value opportunities,’ Hans says adding that logistics software solutions provider WiseTech (WTC) stands out in this beaten down sector. 

Ultimately investors are better positioned by keeping their long-term lens to investing. As Han notes: “take the “long term” out of “long term investing”, what is left is nothing but punting”.