RICHARD WEBB
May 23, 2010
IT WAS like someone rang a bell. Just before 11am on Friday the waves of panic selling that had been demolishing Australian share prices dried up and bargain hunters came out of the woodwork.
Stocks did an abrupt about-face and, after being 3 per cent down in early trade, clawed their way back to be almost level by Friday's close. You could hear the sighs of relief all the way along Collins Street.
These days, financial markets recover almost as quickly as they fall, and local shares, even after Friday's intra-day recovery, remain 15 per cent or so below their April highs. They are sitting at historically cheap valuations.
So what should mum and dad investors do?
- Jump into the sharemarket, buying with their ears pinned back to ride a swift market recovery?
- Should they loosen off their share load on expectation of more falls to come as we head into ''Global Financial Crisis II - Europe falters''?
- Or should they simply sit tight and ride out the volatility until things become a little clearer?
The answer is, of course, none of these. Shares are for the medium to long term and you should not try to second-guess short-term market moves. Traders don't often get it right and they do this for a living.
If you are looking to buy, then look to the long term. It should also be a long-term view that governs your decision to sell, rather than panic over the market falling for a few weeks.
As Austock senior adviser Michael Heffernan puts it, the problem is that once panic prevails, logic goes out the window.
''This is not September/October 2008, but the sharemarket is driven by fundamentals and sentiment, and sentiment is the predominant driver at the moment,'' Mr Heffernan says. ''Cooler heads might perceive we have reached a low point but the market has a mind of its own at the moment and it will defy rationality.''
He says that if you have a portfolio of solid, dividend-paying, blue-chip shares and are risk averse, then ''I would recommend you ride this out and just wait and see.
''If you are looking to buy, and I generally like to buy when the market is going up rather than trying to pick a bottom, I wouldn't be necessarily going head over heels into any sector just yet, but I would suggest you look at the banks, major retailers and mid caps. I would wait until after the election before getting back into the big resources stocks or Telstra, though.''
Pengana Emerging Companies fund manger Ed Prendergast agrees on the mixed market sentiment.
''It's murky at the moment and at times like this it's dangerous to be too definitive.
China may be slowing, Greece is clearly an issue and the resource super profits tax is adding fuel to the fire in our market, but it's hard to see this escalating into another GFC - I would be totally surprised by that,'' Mr Prendergast says.
''At the moment it feels like a lot of people trying to get out of a burning cinema and they are all trying to squeeze through the one door - but if you are taking a medium-term view you shouldn't be fazed too much by the short-term volatility; nothing has changed for many Australian companies but their share price.''
So if Mr Prendergast's mum wanted to invest in shares right now, what would he recommend? ''I would still say she should buy but not invest all of her money in one day - I would say some now, some in three weeks' time and some three weeks after that. That way you've got more time to assess the risks.''
Sean Conlan, senior adviser with Macquarie Private Wealth, says the recent selling in the market was almost entirely driven by foreign investors taking profits - which is also why he believes the Australian dollar took such a pounding as they moved their money out of the country.
''There has been a lot of offshore money parked in Australia as it was considered a safe haven through the global financial crisis and as a bet on China,'' he says.
''But triggered by the announcement of the resource super profits tax, these major overseas funds all decided to take their profits and get out - it's not really been panic selling but a reweighting by foreign investors.''
Mr Conlan says local shares are now cheap, trading at a forward price-earnings ratio of 12.8 times, against the local market's long-term average of 14.6 times.
''It's going to be volatile going forward for a while but there is an opportunity to take advantage of the current value showing in the market.''
The confidence crunch
Why is it so?
■Greece and Portugal sovereign debt concerns: will the $US1 trillion German-backed Greek rescue package work?
■Tighter banking legislation in the US approved on Thursday in response to the subprime debacle: will it constrain the US banking system?
■US economic recovery worries: is employment growth petering out?
■Criminal action against Goldman Sachs: fears over the implications.
■Economic tightening in China: has it gone too far given that property prices in Beijing have fallen 20 per cent and what does this mean for commodity prices long-term?
■Resources tax: what does it mean for our best-performing industry?
■The ash cloud over Europe and the oil spill off the US: both have had major negative economic and environmental implications.
Source: The Age
http://www.smh.com.au/business/should-you-panic-20100522-w2t1.html
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