Sending them packing

Published in the Herald Sun, June 2015 by Karina Barrymore

An old adage is holding true as investors make their seasonal exit.

What on earth happened on the sharemarket this week?

Investors and superannuation savers watched helplessly as almost 5 per cent was wiped off the value of Australian shares in the biggest slump for any week in three years.

Even the experts can’t quite put their finger on the reason.

Australia’s poor economic outlook, overpriced local shares, a gyrating Chinese stock market, more Greek debt problems and rising bond yields are among the likely main culprits for the sharp correction, they say.

However, the most popular explanation is provided by the stockmarket proverb: sell in May and go away.

True, it is now June — and the adage is often said tongue in cheek regardless.

But even academic strategists acknowledge there are seasonal trading patterns that cannot be explained any other way, with the current period being the traditional time to dump and run.

“It’s a definite seasonal pattern in the markets. May to November is usually the weakest time and often when corrections occur — and we’re definitely in that time right now,’’ AMP chief economist Shane Oliver says.

“This is, seasonally, a weak period for sharemarkets and despite the theory having its origins in the northern hemisphere, it still applies to Australia and Asia.

“It always pays to be a bit more cautious around this time of year."

Inor Ries, a senior analyst at stockbroker Morgans, says many of the big European and US-based funds also tidy up their books ahead of the northern hemisphere’s main midyear holiday season.

“Roughly 40 per cent of daily trading on the ASX is done by hedge funds, which typically operate with very large amounts of borrowed money,’’ Mr Ries says.

“As July and August are the holiday months in the northern hemisphere, fund managers are more likely to close out big bets on certain markets or stocks in May and June, to reduce their gearing as they prepare to go on holiday.”

At the same time, Australia is gearing up for the end of the financial year at June 30.

This often means people are selling equities to either realise tax losses on gains before that date.

Most commentators say the Australian sell-off will probably lose steam now.

There hasn’t been a sharp slump like this in a single week since May 2012, and it would be unusual for the market to continue falling much further.

“I believe the sell-off in Australian equities is near its peak and the selling pressure will abate gradually over the next few weeks,’’ Mr Ries says.

Janine Cox, an analyst at fund manager Wealth Within, also says most of the fall is over.

“The market is likely to settle and rise next week or the week after,’’ Ms Cox says.

“The All Ordinaries index has fallen for seven weeks since the high in April — typically our market falls between five to eight weeks.

“Given this, much of the current fall is likely to have occurred, although volatility is likely to remain into early July.”

It’s not all bad news, either, according to analysts. The recent price falls could mean discounted buying.

“With the recent fall, valuations have come back which means prices are at more favourable levels for buying opportunities.’’

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