All Ords Report 29/06/2011

With the announcement this week by the US Federal Reserve Bank that growth in the US is currently below forecast, investors in Australia are most likely wondering how this will affect their investments moving forward, and whether or not to reign in funds invested overseas. Whilst investors are right to be asking this question, warnings were published in the media more than 12 months ago that there may be a few bumps in the road to recovery, which we are experiencing. So rather than reacting to the news, investors need to come back to three simple rules to guide them forward:

  1. Do your research regardless of the amount you have invested
  2. Only invest in good quality assets
  3. Always have a risk management plan or exit strategy, so that you know what action to take if investments don’t go your way

It is true that economic forecasts can change from month to month and this makes markets more reactive when sentiment is already low. However, investors with a plan in place will be equipped to make decisions about their investments regardless of the news. It is during these times that the old saying rings true more than ever, ‘if you fail to plan, you plan to fail’. One major issue investors need to consider when investing overseas is currency risk, as fluctuations in currency can either accelerate or erode returns. For example our New Zealand neighbours have done well by investing in Australian shares or other assets in Australian dollars as it has risen against the NZ dollar. On the flip side, Australian’s investing in the US would have done poorly due to the Australian dollar rising against the US dollar. Investors need to understand that by diversifying investment overseas you add a layer of complexity, therefore before you send money overseas or indeed bring is back home there is more to assess than just the investment itself.

What do we expect in the market?

Since my last report the dark clouds have failed to disperse, and in my opinion have hung around way too long. It is now eleven weeks since the market made its last high, which in itself is quite unusual as falls normally last no more than four to five weeks. We haven’t seen this occur since prior to the low in March 2003 and not even the panic which arose during the height of the GFC kept our market falling for this length of time without a rebound. That said the longer the market falls, the higher the probability that it will soon turn and start to rise again, and I think we are close to that point. To find out more about what has occurred simply click on the link to listen to my podcast series titled ‘Understanding the Share Market post GFC’ of which there are now four podcasts.

As I mentioned in my last report, it is interesting how the All Ordinaries is near a very important band of support between 4,500 and 4,600 points. Yesterday the market made a low of 4,508 points, which although not confirmed may in fact be the low of the current bearish move. Looking back over the past two years, history tells us that a rebound around this level is probable as previous declines in November 2009 and again in February 2010 stopped here. However, the current concern is the level of negativity surrounding the global debt situation, which still remains unresolved and is likely to be this way for some time. Given this, I recommend investors continue to manage risk across their portfolios in case a recovery on the Australian share market is slow to get underway.

Until next time
Good luck and profitable trading

Dale Gillham
Chief Analyst