Relax, we're not down gurgler- 22nd July 2002

James Dunn - The Australian

A LITANY of investment cliches – some contradictory – is running through the heads of investors at the moment as they contemplate the eerily volatile state of the share market in what brokers are calling the "Great Bear" market of 2001-02.



"Never try to catch a falling knife."

"Nobody rings a bell at the bottom of the market."

"The time to buy is when there's blood in the streets."

"Even a dead cat bounces, if it falls far enough."

In their way, each is true. But share market investors don't want to hear any more cliches. They want to know whether share prices are going to stop falling any time soon.

That depends on whether (or when) the US share market can put a floor under its alarming losses.

Having lost 31 per cent so far this year, the broad S&P 500 index has almost halved from its 2000 peak, meaning that it's in the grip of the worst bear market since 1937.

Meanwhile, the tech-laden Nasdaq composite index has lost 76 per cent of its value since its peak, while the elite 30 companies that make up the Dow Jones industrial average have collectively given up 34 per cent from their highs.

Because world share markets are enthralled by US events, they are all falling, too. But Australia's all ordinaries index lost only 14 per cent from its peak, recorded in April this year.

"There hasn't been a bubble in Australia, so there is nothing to burst," says Marcus Padley, client adviser at broking firm Tolhurst Noall in Melbourne.

"But it doesn't mean we won't be feeling the chill wind from across the Pacific for a while."

In fact, says Padley, if you exclude the largest stock in the Australian index, News Corporation – because it's valued by global investors as a US stock – the all ordinaries has actually risen by 8 per cent since the S&P 500 peaked in March 2000.

In other words, the Australian share market has outperformed its US counterpart by 50 per cent in 2½ years.

"Without the loss in valuefrom News Corporation in the last 2½ years, the all ordinaries index would be about 446 points, or 14.7 per cent higher."

But because Australian investors are conditioned to watching their own index, they feel that they are in a slump.

And in any share market slump, investors need to be reminded that a loss is only a loss when it's crystallised, or made real, by selling.

Until then, it's only a calculation – unless you happen to have retired in the past 12 months.

"There is not much point in selling your shares at this stage," says Hans Kunnen, head of investment markets research at funds manager Colonial First State.

"If you're a trader, your stop-losses presumably got you out of the market a long time ago. If you're an investor taking a long-term view with a diversified, quality portfolio, you know that your shares will recover."

Kunnen says the sensationalist tone of the financial headlines is something that experienced investors have seen before.

"If you've seen slumps, like 1962, 1975, 1987 and 1994, you get used to them, and you know that the market always overshoots on the downside, just as it overshoots on the rise," he says.

"This is no different from any other slump in Australia: the US market, because it left ours for dead on the upside, is dealing with an event that is much more significant, even on a hundred-year view.

"But because our market was 'boring' in the 1998-2000 boom, it's in much better shape now. Australia simply doesn't exhibit the kind of fundamentals that point to a sustained period of weakness on the share market."

Peter Thornhill, former funds manager turned share-market educator, and principal of motivatedmoney.com, says that for investors, a market downturn like this "is as good as Christmas".

"The share market can sometimes be a time machine, and in this case, it's taken you back to 1999," Thornhill says.

"If you wanted to buy shares then, but you lacked the courage, it's giving you another chance, all because the American market is making the long journey back from 'irrational exuberance' to its sustainable long-term growth rate." As a shareholder, the last 12 months have been great for me," he says. "All of my dividends have risen. Commonwealth Bank, Telstra, ANZ, National Australia Bank, Woolworths, all pay me more. I'm in a better position than I was 12 months ago.

"Why should I worry because their share prices have gone down? I don't intend to sell them. I'm using them to generate wealth over the long term."

Even though canny investors treat market downturns as buying opportunities, "there's no point being a hero about it", says Dean Fergie, investment director at boutique investment manager Opis Capital in Melbourne.

"We think sentiment is a bigger driver of the market than fundamentals at the moment, so we're sitting on our cash," Fergie says.

"There are certainly some very attractive buys, but the problem is they could go much lower. Even if I think that Macquarie Bank looks a bargain at $23, it could be $19 by Friday. It's that sort of market. We want to wait for stocks to stop falling."

One of the pitfalls of the times is that investors are constantly being told to forget the days of double-digit growth in the share market.

But Tim Rocks, head of strategy at broking firm Macquarie Equities, is not so sure that they're over.

He says investors buying stocks now can be reasonably confident, if they select well.

"As the markets were rising, we should have been ratcheting down our expectations of what were sustainable long-term returns," Rocks says.

"But we didn't. Similarly, now that the markets are falling, we're making the opposite mistake. We should actually be lifting our estimates of what are sustainable long-term returns.

With higher dividends and higher GDP growth, we can see that sustainable long-term return for Australian shares at about 9 per cent. We think it's not hard to start thinking about double-digit returns again."



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