Investors told to ride out storm

Published in The Sunday Times, August 2007

These are unprecedented times for many investors in the Australian stock market.

The severe bout of panic that saw the Australian stock market roller-coaster through the past week has left many investors bruised, confused and asking "what now?''.

Mixed messages from global markets on Friday night have only added to the uncertainty.

While US and European stocks rallied on Friday night, stocks across Asia plummeted, some by as much as 5 per cent, amid continuing concerns about the US mortgage crisis.

The Japanese market suffered its biggest one-day fall since the tech-wreck of 2000, losing 5.42 per cent on Friday.

Most market experts are advising investors to steel their nerves and hold tight for what they say will be an inevitable return to an upward trend.

AMP Capital Investors head of investment strategy and chief economist Shane Oliver said the local market would bounce back. ``I'm pretty confident we'll get a rebound through the final quarter of the year,'' Dr Oliver said.

Often, when we go through these shake-outs, it takes a couple of months for the dust to settle. We could have another couple of months of volatility, but I think the bulk of damage has been done.''

Dr Oliver said the market had been running hot and was due for a correction, but the decline happened quicker than anticipated.

The benchmark S&P/ASX200 has lost 11.7 per cent, about $186 billion, since its record close of 6422.3 on July 24 in the wake of problems in the US subprime mortgage market and a consequent credit squeeze.

Investors Mutual Ltd investment director Anton Tagliaferro said the correction was long overdue. ``The trigger for this correction has been the turmoil in credit markets, which, while pretty serious, will settle down at some stage,'' Mr Tagliaferro said.

While we are not out of the woods yet, I believe we are more than halfway through this phase and that the liquidity panic phase may be over fairly soon.

Hopefully, good stocks will soon get good support, while rubbish will continue to wilt and fall further.''

Mr Tagliaferro said he would advise investors to steer away from resources stocks in the present climate.

Even the good blue chip names, like Rio Tinto and BHP,'' he said.

The impact of the sharemarket falls and credit crunch turmoil on the real economy are unknown at this point, but are very unlikely to be positive, which will negatively impact on future demand for their output.

As investors become more risk-averse they will be less willing to own intrinsically volatile stocks like resource shares.``Many resource stocks do not pay good, reliable dividends and are on low yields. Dividends will become more valuable to many investors going forward.''

Dale Gillham, chief analyst at Wealth Within, said history had shown that the best time to buy shares was following a pullback.

Given this, anyone with a long term outlook should sit back and wait right now until the dust settles as they will shortly be able to buy into some top blue chip shares at discounted prices,'' he said.

That said, given the increased volatility in the market, I believe now is the time to be conservative if you are using borrowed funds or highly leveraged instruments such as CFDs, as these methods increase your risk and amplify the losses.''

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