All Ords Report 22 December 2016
Long term investors are not always rewarded for loyalty, instead you may be forced to sell your shares.
This can occur if a takeover offer has been made to buy the company whose shares you hold. At the time, if your shares are trading above the price you paid you will receive a premium. Shares can jump by around 20 per cent in value at the time of an announcement. However, if your shares are in loss you may not be happy about selling them.
An example of where this may have occurred in recent years is with shares in mining and mining related companies, which fell 60 to 90 per cent between 2011 and 2015. However, as commodity prices started to recover the shares of many of these companies began to rise quite strongly.
If you have held shares in these companies you may believe that your shares will eventually recover, and hopefully trade to at least the value paid. However, larger companies looking to buy up smaller companies at low prices may stop this from being realised.
It hardly seems fair that you may have to sell your shares at whatever price is offered, particularly if you have held them over the medium to long term through a major decline.
Remember that you have a right to question the directors if they vote to accept any offer, particularly if you believe that the shares have the potential to move higher over the coming years. The charts tell all.
There are two theories you can use to determine where your shares are trading in terms of the bigger picture. Put simply, shares will move from a low to a high to a low, in a recognizable, repeatable pattern and it is possible to identify this pattern on liquid shares.
As an example, consider the company Bradken Limited (BKN). It appears to have completed a significant low in January 2016, which is likely to be the end of a pattern. This means that the probability is high for BKN shares to rise in the medium to long term. Therefore, shareholders who elect to sell their shares as part of the takeover offer may be missing out on future value.
In a takeover, it is wise to consider the view of the Board of Directors of the company you own shares in and if you have the knowledge to recognise patterns on a price chart, check a monthly price chart. Also, read all of the information sent to you by both companies before you agree to sell your shares.
While we are on the subject of mining stocks, you are welcome to listen to Talking Wealth Podcast 671, titled "Commodities are back in the spot light".
What do we expect in the market?
The Australian share market has been quite bullish over recent weeks and is finally trading in an important zone of resistance as mentioned in my previous report between 5640 and 5670 points. A strong weekly close above this level will indicate that our market is likely to remain bullish in the medium term. However, in the short term we may see Australian shares give back some of the recent gains as the market builds support to push higher.
The next short move down will be a real test of resolve for short sellers who may still be sitting on the sidelines waiting to push the market lower. However, we are likely to see less of this activity through the festive season when trading volumes are generally light.
While the market has faced a few challenges this year, including the emotions around Brexit and the US election, it has continued to rise, which is good for investors in 2017.
The story that Australia may lose its AAA credit rating created some doubt in the minds of investors. Fortunately this didn’t occur as it would have an impact on borrowers and the broader economy.
Questions have been raised as to whether the festive season will be quiet for retailers, however, estimates indicate that Australians will have spent $47bn by Christmas Day, representing an increase of around 4% on last year. Strong retail sales would support higher share prices in this sector.
One final word on global markets for the year, the Dow Jones Industrial Average is still trading below resistance of between 20000 and 21330 points, where it is likely to trade to during the coming month.
On behalf of the team at Wealth Within, enjoy the festive season and have a safe and happy New Year.
Dale Gillham is Chief Analyst at Wealth Within