The Australian sharemarket is down sharply today following an overnight global sell-down. Given the events of the last few weeks (and months), I have put together an article with my thoughts.
The key issues facing investors at the moment are threefold:
- weaker than expected economic data in the United States,
- political instability in the way the United States dealt with increasing its borrowing limit, and
- fears that European sovereign debt concerns have spread from Greece (causing a liquidity problem for Italy and Spain).
Addressing the issues in the United States firstly...
The recent decision to raise the United States debt ceiling has removed considerable risk in the short term.
We must assume that the United States will take action over the next few years to ensure it is on a sustainable long term fiscal path. It was unfortunate however in the way United States congress dealt with the issue at the 11th hour, stripping away investor confidence.
The sovereign debt issues facing Europe are more complex.
The good news is that the European Union and the European Central Bank have finally recognised the insolvency issue in Greece. The bad news is that European Central Bank needs to come up with sustainable policy options to help finance struggling economies. This will take time...
Moving away from “macro” events to the fundamentals of the Australian sharemarket.
When investing in shares there are two types of returns; 1) dividends (income) and 2) capital growth. Capital growth has been nonexistent over the past 12 months for the reasons noted above. Dividends however are strong.
The dividend income (adjusted for tax credits) for the entire Australian sharemarket (as measured by the ASX 300 index) is currently around 6.50% per annum. The RBA cash rate is currently 4.75% per annum – meaning that there is a premium to investing in shares of around 1.75% per annum to long term investors.
The premium that exists today is in stark contrast to events leading into the Global Financial Crisis.
Leading into the GFC shares were arguably overvalued with dividend income at around 4.00% per annum. Conversely the RBA cash rate peaked at 7.25% per annum. Therefore, leading into the GFC there were obvious signs that shares were overvalued.
Given that there are no obvious signs that shares are currently overvalued, it is unreasonable to predict falls in the Australian sharemarket of the magnitude experienced in 2008/09.
As it currently stands there is a real premium to invest in shares provided you have time to weather the short-term market volatility.
For more information please contact Ryan Love on 1300 856 338 or ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.