May Review Comments
Written by Tony Gray   
Wednesday, 12 May 2010 17:28

General Market Comment

After breaking the 5000 index level in mid April, the Australian sharemarket reversed sharply in late April and the first week of May.  The Reserve Bank of Australia increased interest rates by another quarter of a percent in early May.  Despite the major banks achieving target earnings as they reported first half profits, the ‘market’ sold down the sector.  Resource stocks were savaged following the government’s policy of applying additional tax on mining and on-shore oil and gas producers.

Internationally the realisation dawned that bond investors were not going to continue lending ever larger amounts to Greece and other states with large structural deficits.  This saw panic selling globally on fears that this would trigger bank failures and another global financial crisis.  The Eurozone came out with a massive plan (based on borrowed money) to ensure Greece, Portugal et al could refinance debts if the market was unwilling and this has stabilised markets in the short-term.

What has been most apparent in this correction is the fragility of investor confidence globally.  Following 2008, institutions, advisers and investors now know the extent to which markets can fall and they are far readier to sell assets and move to cash or defensive assets.  Investors are less prepared to accept losses of the magnitude of 2008 or accept advice to simply hold and ride out the cycle.  Investors in Australia also seem to have lost faith in the policy of the Federal Government – with rising taxes, wasteful spending, rising debt levels and budget deficits – despite the fact that Australia apparently did not enter recession!

The market psychology is such that we are unlikely to see an upward trending bull market develop and it is my belief that we are now in a sideways ranging phase.  I have previously suggested this phase could last for an extended period.  In this environment we may see opportunities to add growth assets and opportunities to sell growth assets perhaps once or twice a year.  This is a different pattern from the buy and hold mentality associated with a bull market.

It is doubtful that the current sharemarket correction has finished and I would be hoping for more meaningful falls to reveal buying opportunities.  There remains the risk that European debt issues lead to larger falls, but either way in the short-term the tactical move is to hold more defensive assets/fewer growth assets within the context of your investment strategy asset ranges.

Cash & Fixed Interest

Interest on at-call cash accounts have risen with Reserve Bank rate increases, but term deposit rates are in fact slightly lower after the last two official interest rate rises.  The bond yield curve suggests interest rate rises are coming to an end and we are generally extending duration by placing some funds in two or three year deposits as part of a rolling maturity approach.  We expect that higher global bond yields will eventuate and limit gains for growth linked assets.

Australian Shares

We do not believe that the adjustment (fall) of share prices for most mining and energy stocks properly accounts for the cut in after-tax cash-flows that will flow from the so call Resource Super Profits Tax (so called since it is a tax on most income and not just ‘super’ profits).  Further, the sector is high risk as there are some concerns about China’s growth rate slowing and as 2008 demonstrated, the fall in metal prices, oil prices and associated share prices can be swift and savage.  This sector and stocks with higher debt levels or lower interest cover are the first to sell to raise cash.

International Shares

Recent movements confirm our view that falls in Australian and international shares are likely to be accompanied by a falling Australian dollar.  This provides some cushioning against losses from international investments.  We continue to look at specific exposures in the health and technology sectors that provide true diversification from the Australian sharemarket – but are not generally committing new monies as we have increased weightings to defensive assets.

Listed Property

Higher interest costs and capitalisation rates will most likely limit gains for the sector, although income should step up in line with inflation and income yields remain sound.


Last week demonstrated the hedging benefits of gold in portfolios – with the Australian dollar price of gold benefiting from a weaker local dollar and the flight to safety boosting the $US price of gold.  The super profits tax has impacted Newcrest and our preferred exposure is through exchange traded fund units (ASX code: GOLD).  These are backed by 1/10 of a troy ounce of gold per unit.

Aside from holding more defensive assets/fewer growth assets on a tactical basis, adding gold introduces an asset that can rise when the global financial crisis next tests investor resolve.  We also remain positive on the supply/demand dynamics for gold.  Clients may review the December 2009 article What Value Gold posted on the TG Financial website, although stock references are dated.

You are welcome to contact us with specific investment and planning queries.

Best wishes,

A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin, MAICD
Principal, TG Financial

Please treat the above comments as General Advice, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Monday, 17 May 2010 14:06

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