An overseas spoiler for the financial new year

The Australian market is becoming increasingly unattractive for overseas investors, whose exit is contributing to a falling bourse.

Try to understand how miserable it is to be a long-term overseas investor in the Australian share market.

It’s true that Monday morning’s fall was in reaction to the possible end of quantitative easing in the US as well as disappointing PMI results in China and that, with Hong Kong's exchange closed for a public holiday, selling has been concentrated in the Australia market. So was not our fault. But the Australian pre-noon fall is much more than that.

First, we all watched what appeared to be some pre-June 30 ‘window dressing’ (not market rigging, of course) so that players could get their commissions and executive bonuses. Also, the 2012-13 share performance figures looked better.

The ‘window dressing’ was at the margin, but it was the first contributor to the July 1 morning slump.

More importantly the Australian dollar looks like heading south of US90 cents and, as I pointed out earlier today, is on its way south of US80 cents as the financial year proceeds. Given that just over two months ago we were around US106 cents that is a mighty wallop for overseas share investors. Many say ‘we want out’, so they sell, shares fall and the currency losses of those that stay in are multiplied.

Much better to invest in US dollar securities.

Then you see the Reserve Bank of Australia looking at reducing interest rates further to give the currency an extra nudge. As well, overseas investors see Australian mining investment – which has been the linchpin behind the Australian economy – about to be slashed and commodity prices, lead by gold and coal, way down.

Finally, you see a man take over as prime minister and find that a large number of the previous cabinet steps down because they think he can’t do the job.

But the opinion polls say he could win. If he was to win the Australian dollar and shares would fall even faster. So selling is also playing safe.

But, of course, in this process there will be many big movements both ways. The overseas selling is often concentrated in the morning.

For Australians, share yields are rising once again. As the overseas investors exit there will be greater value but falls like this morning are not a pleasant experience – particularly if you are leveraged.