Black bear wakes
History suggests that a sleeping market will stir imperceptibly before the first rays of hope appear,
writes
Noel Whittaker
EVERYWHERE I go one question dominates "Have we hit the bottom yet?"
It’s impossible to answer because nobody can consistently pick the top or the bottom of any market.
But, being an incurable optimist, I do have a strong faith in the future of the world in general and in Australia n particular.
Therefore, buying quality property and shares in the current gloomy conditions appears a much better strategy than sitting on the fence hoping you can catch the inevitable upturn when it comes.
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Yes, we have seen our share portfolio, and with it our superannuation, fall by 50 per cent or more. Staying the course and waiting for the market to recover becomes more unpalatable as the market plumbs new depths every month.
However, if you decide to move your hard-earned money to cash now you will be forced to accept an interest rate of 4 per cent at most.
At that rate it would take at least 25 years just to recover your losses.
I use the term "at least" because the income from the interest-bearing account will be fully taxable.
In contrast, the capital gains that will happen when the share market rebounds are tax-free because you are merely recouping capital losses and the income from most share portfolios is from franked dividends, which are tax-free for anybody earning less than $80,000 a year.
The main problem right now is uncertainty. Even companies that are doing well are having trouble making accurate forecasts because they don’t know how long the tough times are going to last. Many soundly managed companies with moderate levels of debt are faced with refinancing their debt as international banks pack their bags and go home.
Within a year or so it’s highly probable that life will return to normal and earnings can be more realistically forecast.
Keep in mind that there have been nine major bear markets in Australia, and it has taken between 15 months and just under eight years for portfolio values to be restored. The average is 3½ years.
And when markets do bounce, the size of the bounce is large — averaging 32 per cent in the first year over the past nine bear markets.
The next bounce may well be even bigger because of the weight of money sitting on the sidelines.
In Australia alone self-managed super funds are holding more than $140 billion in cash, and in America cash-type assets now exceed $US5 trillion. Most of this money will eventually find its way into shares.
Investors now have a choice. They can stick with their portfolios and enjoy a running yield of better than 6 per cent per annum while they await the upturn, or put their money in the bank and condemn themselves to waiting 25 years for their portfolios to recover.
Let’s give the last word to veteran fund manager Jeremy Grantham, who manages more than US$56 billion on behalf of major American institutions.
In his newsletter this month he wrote: "Everyone is watching and waiting with their inertia beginning to set like concrete ... we now believe the S&P is worth 900 at fair value or 30 per cent above today’s price.
Global equities are even cheaper. If you invest too much too soon you will regret it, but if you invest too little after talking about handsome potential returns and the market rallies, you deserve to be shot.
"Perversely, seeking for optimality is a snare and delusion, it will merely serve to increase your paralysis.
"Investors must respond to rapidly falling prices for events can change fast. In June 1933, long before all the banks had failed or unemployment had peaked, the S&P rallied 105 per cent in six months.
"Similarly, in 1974 it rallied 148 per cent in five months in the UK. How would you have felt then with your large and beloved cash reserves?
"Finally, be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before."
Noel Whittaker is a director of Whittaker Macnaught, a division of St Andrew’s Australia. This advice is general in nature and readers should seek their own expert advice before making financial decisions. noel.whittaker@whittakermacnaught.com.au
thesundaymail.com.au THE SUNDAY MAIL March 22, 2009 Page 67
