Money
Issue No. 42 - August/September 2008
Big Cash stands on the sidelines
by David Leon and David Leon
The equity market struggled through the month of June from a starting index base of 5662 (ASX200) to close at 5215. This represents a fall of 7.9% in the month. In addition, the ASX200 has now declined by 17% for the first half of this calendar year.
In the past 20 years, only in 1990 did the Australian equity market fall by more than 17% over a full 12 month period – in that year, the All Ords (as it was defined at the time) declined by 17.5%.
Continuing concerns over credit markets have significantly reduced any investor appetite for risk across the globe.
In Australia, some economists are now even forecasting interest rate increases as inflationary pressure continues to build. This is contrary to recent statements from the RBA that would suggest its leaders believe the combination of lending institutions increasing interest rates and rising petrol prices are likely to be sufficient to reduce demand and hold back inflation.
In this uncertain environment, equities have a tendency not to perform consistently even when valuation metrics indicate the market is relatively attractive.
Even though we have already seen a range of earnings downgrades in advance of the profit reporting period (for June 2008), many investors continue to remain sidelined awaiting greater confidence in the outlook for 2009 earnings.
Index Performance vs Individual Performance
Investors should be aware of the difference between index performance compared to the share price momentum of individual stocks. An index weights companies by market capitalisation (the number of shares multiplied by the stock’s price). This means moderate changes in large company prices can significantly outweigh substantial changes in smaller companies giving us a skewed interpretation of how a share portfolio is actually doing.
The best performing stocks...
