Share dump is opportunity to make money, say investment gurus
By John Collett
Australia's benchmark share index has fallen by about 5 per cent this week, wiping about $84 billion from the market's value, but fund managers insist shareholders should remain calm.
At the market close on Tuesday, the local S&P/ASX 200 index sat at 5833 points, having fallen from more than 6100 points on Friday.
Blue chips were amongst the stocks belted on Tuesday as Australia joined markets around the world in echoing sharp declines on Wall Street. The Dow Jones Industrial Average fell 4.6 per cent on Monday night Australian time, posting the biggest point slump in its history.
Locally, Commonwealth Bank closed on Tuesday at $77.40 cents, down almost 3 per cent from Monday's close and more than 4 per cent for the week. Telstra closed at $3.51 cents, down about 3 per cent from Monday, and 4.4 per cent for the week.
But investors stressed the view that the turmoil has nothing to do with Australian fundamentals.
Michael Heffernan, senior client adviser and economist with sharebroker Phillip Capital, said whenever the US market fell, the Australian market did too.
"But there is no reason for us to fall, at all, but we do and that's what the market does and there will probably be a shake-out for a few days," he said.
"You can whip yourself into a frenzy when markets drop and some people are calling it a plunge, but where were they when sharemarkets crashed in October 1987 when the US shares index [Dow Jones Industrial Average] went down almost 25 per cent in one day."
Anton Tagliaferro, the investment director at fund manager Investors Mutual, said the Dow rose 12 consecutive months during 2017, the first time that had happened.
The Dow started 2017 below 20,000 points and rose to more than 26,000 points in January this year - a gain of more than 30 per cent.
A major trigger for the falls now is investor concern that America's central bank, the US Federal Reserve, will be more aggressive in lifting interest rates as the US economy improves. Monday's slump came in the wake of stronger than expected jobs figures.
Rising interest rates are generally bad for companies' profitability; though those effects can be offset by better trading conditions expected in the US as its economy continues to improve.
Smart people will see these declines as perhaps opportunities to invest.Michael Heffernan, Phillip Capital
Overdue for correction
Since the start of the global financial crisis a decade ago, central banks throughout the developed world have kept interest rates at very low levels.
They have done that to make borrowing cheaper and implemented "quantitative easing" [money printing] in Europe and the United States, which ended in the US in 2014, to help stimulate economic activity.
"The US sharemarket is long overdue a decent correction," said Shane Oliver, the chief economist at AMP Capital Investors. A correction is a fall in prices of at least 10 per cent.
However, he is expecting the pullback in shares both here and overseas to be limited in depth and duration.
That, he said, was because he did not expect a US recession, with US profits continuing to rise, nor did he think that the rise in bond yields would be too abrupt.
However, it was likely to be a more volatile year than last year on sharemarkets, he said.
The Australian sharemarket has lagged the gains of overseas markets over the last 12 months, with prices rising about 7 per cent during 2017.
There are some exceptions. The resources sector gained more than 20 per cent during 2017, with BHP Billiton and Rio Tinto leading the charge thanks to higher prices for iron ore and oil. BHP closed on Tuesday at just over $29, down about 3 per cent on Monday's close, while Rio closed at just over $75, down about 1.5 per cent.
Mr Tagliaferro said while the Australian sharemarket would weaken in line with overseas markets, he expected the main pain would be felt in areas such as the resources sector and the speculative smaller stocks.
Hamish Douglass, co-founder of Magellan Financial Group, in releasing its profit results on Tuesday, said he had been cautious on the outlook for global sharemarkets.
Mr Douglass said the global shares specialist fund manager's core global equity funds increased its cash holdings to 13 per cent from 8 per cent over the past couple of months.
Having more money on the sidelines and out of sharemarkets should help insulate somewhat the fund manager's investors from the turbulence on markets.
Magellan unveiled a 25 per cent rise in underlying profit, after tax, to $109.2 million for the six months to December 3, 2107 compared to the previous corresponding six months.
Magellan announced two acquisitions – Frontier Partners Group which has been Magellan's distributor in the North America since 2011 and Australian shares specialist fund manager, Airlie Funds Management.
John Sevior, who co-founded Airlie in 2012, said the market volatility should be kept in perspective.
The fall in US share prices had only wiped out the gains of January, he said.
Opportunity to invest
Mr Sevior said Australian share prices had been elevated and he had been frustrated at not being able to buy shares in businesses he liked at reasonable prices.
He sees opportunities to buy good businesses at more attractive prices.
Mr Heffernan said Australia's economic fundamentals looked alright, with retail sales figures, for example, up 0.9 per cent in a month.
"The market is the market and no matter what the economic fundamentals say should happen, it is not always like that in the short term," Mr Heffernan said.
"Smart people will see these declines as perhaps opportunities to invest."
James Carlisle, the head of research at Intelligent Investor, said the best response to falling share prices was not to fear further falls, but to step back and look at the bigger picture.
"Over the past two trading days, our market is down about 5 per cent, but that just takes Australian share prices back to where they in October.
"Active investors should be combing their watch lists, looking for stocks whose prices provide a decent margin of safety compared to their views of their value, Mr Carlisle said.