January 18, 2008 05:12pm
THE Australian share market has made a grim start to the year.
The market continued to haemorrhage this morning, plunging 2.65 per cent in the first 15 minutes of trading amid growing fears of a US recession.
Were the US to slide into a recession it would trigger a global downturn that would affect worldwide markets and interest rates, including Australia's.
Australia's share market is now in its tenth consecutive day of negative trading. It comes on the heels of another horror session in Wall Street overnight.
The Bush administration is preparing a massive stimulus package worth up to US$150 billion to help resuscitate the flagging economy, signalling that it now perceives a real threat to the economy.
Even the traditional safe haven of gold, which investors scrambled to over the holiday period, has been volatile with prices beginning to slide after its recent record highs.
At close today the benchmark S&P/ASX200 index had fallen 0.84 per cent, the broader All Ordinaries had shed 0.98 per cent. (Full share market report)
Overnight, the Dow Jones Industrial Average sank 2.46 per cent, the tech-heavy Nasdaq lost 1.86 per cent and the Standard & Poor's 500 fell 2.83 per cent.
The US outlook is bleak after the country’s major banks have reported multi-billion dollar losses following the sub-prime mortgage crisis.
The US Federal Reserve chairman Ben Bernanke further unsettled investors overnight with talk of pumping up to $US150 billion ($170 billion) into the US economy in a bid to stimulate growth.
"Ben Bernanke's comments on a potential economic stimulus package from Congress did little to instill confidence among traders," said Joseph Hargett at Schaeffer's Investment Research.
Al Goldman, at AG Edwards, said the prospect of recession was still the main fear for Wall Street.
"Concerns about a possible recession and its impact on corporate earnings remain the major problems overhanging investor emotions," he said.
"A recession, which we continue to believe is the most likely economic scenario, will have a big negative impact on corporate earnings."
Think first, sell later
CommSec equities analyst Juliana Roadley said the Australian sharemarket remained a good vehicle for retail investors and the the environment would also present some bargains.
"Everyone is in a panic mode ... they're not looking at the fundamentals,'' she said.
"The book value and the face value of (a lot) of companies listed on our exchange at the moment are well above the value of what they're being traded at.
"So the share price values are way below where they should be.''
Ms Roadley said that rather than panic, investors should look to ride out the troughs.
"Don't get panicked, don't sell out - you might have some really good assets there.
"OK, you're going to see a bit of a fall, you might lose six months worth of growth, or in some cases eight months worth of growth, but then you've got to buy back in.
"You've got to sell out and pay brokerage, then you've got to buy back into the market at a lower level.''
One bright spot for Australian consumers could be a stay in interest rate hikes.
The RBA has to keep inflation growth beneath 3 per cent - uncertain financial markets could dampen spending and ease inflationary pressures.
Official inflation data comes out next week.
AMP Capital chief economist Shane Oliver told The Australian a 25 basis point move by the RBA coupled with the average 15 basis point increase in variable home loan rates by banks recently would be too much for consumers.
"I think they (the RBA) will stay on hold,'' Dr Oliver said.
"The global economy is more of a factor than the RBA thought it was going to be last year. The downturn will have an impact on the Australian economy and it will dampen global inflation pressures,'' Dr Oliver said.
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THE share market has been hammered again this week, but analysts say investors should refrain from being caught up in panic-driven selling and instead look to ride out the financial storm.
Tens of billions of dollars have been wiped from the value of the Australian sharemarket this week as fears of a US recession continued to percolate.
A string of large corporate losses in the US, stemming from the global credit crisis, have added fuel to the fire that has seen the local bourse dive by almost 15 per cent since hitting a record high on November 1.
This week alone, US banking sector heavyweights Citigroup, JPMorgan and Merrill Lynch reported huge write-downs linked to the US sub-prime mortgage meltdown.
Citigroup announced it had written off a massive $US18.1 billion ($20.1bn) and posted a fourth-quarter loss of $US9.83bn.
JPMorgan, meanwhile, announced its quarterly profit had fallen a worse than expected 24 per cent after it lost $US1.3bn on risky mortgages and set aside more money for rising losses on home equity loans.
And Merrill Lynch, the world's largest brokerage, lost nearly $US10bn in the fourth quarter, its biggest quarterly loss since it was founded 94 years ago, after writing down $US14.6bn of investments related to the ongoing credit crisis.
The losses in the US have seen Wall Street continue to tank, dragging the Australian market with it.
But CommSec equities analyst Juliana Roadley said the Australian sharemarket remained a good vehicle for retail investors and the the environment would also present some bargains.
"Everyone is in a panic mode ... they're not looking at the fundamentals,'' she said.
"The book value and the face value of (a lot) of companies listed on our exchange at the moment are well above the value of what they're being traded at.
"So the share price values are way below where they should be.''
Nonetheless, Australian share prices have fallen in the turmoil, prompting many `mum and dad' investors to question whether the the stock market is the right avenue in which to sink their savings.
But Ms Roadley said that rather than panic, investors should look to ride out the troughs.
"Don't get panicked, don't sell out - you might have some really good assets there.
"OK, you're going to see a bit of a fall, you might lose six months worth of growth, or in some cases eight months worth of growth, but then you've got to buy back in.
"You've got to sell out and pay brokerage, then you've got to buy back into the market at a lower level.''
AMP Capital Investors chief economist Shane Oliver said the current environment presented some good opportunities - particularly for long-term investors.
"I think there's lots of value there now ... in a valuation sense the market is starting to look pretty attractive,'' he said.
"For long-term investors it's a good time to buy ... for a short-term investor I would probably stay out for the time being.''
Dr Oliver said the main factor driving shares down was falls in US markets driven by recession fears.
"It's quite easy to get caught up in this environment ... big falls in the market and headlines screaming US recession and a bear market.
"But it is a $1.5 trillion share market, so in the great scheme of things it's not that disastrous - it's quite normal for the market to have 10 to 20 per cent corrections and we're pushing towards the top end of that.''
"I don't necessarily think we're at the bottom yet but one approach is to average funds in over the next few months to take advantage of good buying opportunities which are now evident.''
"Often by the time people get out the bulk of the falls are over, and by the time they get back in the sharemarket has already recovered.''
"The biggest mistake an investor can make is to get out in a panic.''
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