Over the past week you may have noticed that global share markets have ‘pulled-back’ significantly. I have provided a brief commentary below on the issues facing the share market at the moment. If you would like further information, please don’t hesitate to contact me to discuss.
Henry Review – Resource Super Profits Tax
On Sunday last week, the Federal Government released the long awaited Henry Review into the taxation system. The most contentious of the proposed changes is the Resources Super Profits Tax. This tax seeks to impose a higher rate of tax on resource companies who make profits in excess of the bond rate (i.e. corporate borrowing rate).
The announcement of the Resource Super Profits Tax caused resource stocks to fall significantly on Monday and Tuesday last week. It is important to note that any changes to the tax system cannot be implemented without changes to tax legislation. It is unlikely that the Liberal Party will support this tax it its current form. Therefore, to pass as legislation, the new tax will require the support of the Greens and Independents in the Senate.
The fall in resource stocks last week appears to be a short-term overreaction. The Federal Government faces an uphill battle in getting legislation passed in its present form (particularly considering it is an election year).
Greece and European Credit Markets
For some time Greece has been negotiating a ‘bailout’ package with the Eurozone countries and the International Monetary Fund. Greece required a ‘bailout’ package due to a history of excessive government debt and spending. Like with any household budget, if you keep spending more than you are making ultimately you will struggle to repay your debts. This is exactly the issue facing Greece at the moment.
The ‘bailout’ package imposed strict conditions on the Greece Government to cut spending. This has led to widespread civil unrest, which has been picked up in media reporting.
As Greece is part of the European Union (something that Germany and the stronger Euro economies may be now regretting) and trades the Euro as its currency, the stronger European nations of Germany and France have no choice in my view but to support Greece through this crisis.
The market has reacted negatively to the Greece situation, as in certain circles there are fears that the Greece debt crisis may spread to other weaker European economies such as Portugal, Spain and Italy (to a lesser extent).
Any widespread government failure to repay debt may trigger a new ‘credit crisis’. However, it must be said that a widespread credit crisis of the same magnitude of the Global Financial Crisis is considered highly unlikely at the moment.
I expect the market to continue to be volatile for a couple of months whilst the Eurozone counties come to grips with the best way to handle this situation from a political perspective.
What we can learn from the Global Financial Crisis is that Australia is a well placed economy and that our companies can continue to generate profits despite trying global economic conditions.
On a long-term basis I remain very upbeat on the prospect of global share markets and view the recent market dips as a good opportunity for long-term investors to enter the market.
In the short-term there may be some more market falls (depending on how easily the politicians can negotiate ‘bailout’ terms) however I expect once this situation is resolved global share markets will recover swiftly.
This week we will see the Federal Government announce the Budget which may further add to market volatility.