Money
Issue No. 19 - October/November 2004
Trade cautiously
by Tony Catt
Sharemarket investors should guard against becoming over-exuberant after sharply rising prices for much of the past year. Treat shares with cautious optimism.
The caution is necessary because much of the market appears fully priced. At the time of writing, many stocks had eased from their all-time highs. The level of risk in the sharemarket is rising.
One of the characteristics of the market since bouncing back from its low point in March last year is that the rally in share prices has been indiscriminate, taking in quality and indifferent companies. But going forward, you should be highly discriminating when determining what stocks should stay and be added to your portfolio.
The Australian market is now vulnerable to shocks from overseas, particularly the US market where valuations are higher. Influences creating risks for international markets include turmoil in Iraq, high oil prices, concerns over inflation, expectations of higher interest rates, and questions over whether China's remarkable growth will continue.
Nevertheless, the positive features facing the sharemarket cannot be overlooked. Australian stocks appear not to have reached the point of being overvalued. Under-valued stocks, however, are harder to identify because a lot of optimism is already reflected in the prices.
The market can rise higher over the next 12 months but the gains will be relatively subdued. There are widespread expectations among market analysts for...
