Australian Finance Companies Unique Take on Equity Market

By: Phil Mathieson

"The stock market is designed to transfer money from the active to the Patient" Warren Buffet
Those investors who panicked and sold shares following the 10% fall in Australian Equities a few weeks ago, obviously did not take heed of this famous quote. We now know that the market rallied to recover most of the losses soon thereafter.
The factors influencing the market
Equity markets are likely to remain extremely volatile in the short term as ongoing defaults in US subprime (high risk) mortgages reduce the amount of credit available worldwide and diminish returns from banks, retailers and construction stocks. Investors are concerned that rising interest rate in Australia may slow the economy. Banks are raising mortgage rates because they are limiting who they lend to, thus impacting on their profits. At the same time, a faster rate of inflation in Australia has prompted the Reserve Bank of Australia to increase the cash rate from 6.75% at its last meeting in early February.

This in turn has strengthened the Australian dollar.
The opportunities
The Australian economy remains sound even if interest rates continue to rise. Unemployment is low - spending on infrastructure is rising - high commodity prices are likely to support mining stocks.
Fund managers are now finding undervalued stocks, dividend yields have improved and earnings growth is likely to remain in the high single to low double digit percentage rates. These factors point to favorable long term returns.
The General Advice
Don't panic! - We have experienced market corrections in the past and periods of negative returns are "normal" occurrences. In general investors who have remained in the market have achieved the best long term results.
Resist the temptation to "time the market" - It is almost impossible to anticipate the short term fluctuations in market values as last weeks' events demonstrated.
Remain Diversified - While both shares and property have experienced negative returns in recent months this rarely prevails for long periods. Your portfolio will also provide diversification of fund managers which also reduces risk.
Summary
Whilst the above is general advice only it is worth remembering that the stock market is really a "daily auction" of assets and can at times, be overly influenced by either positive or negative sentiment. Over time the market will reflect the true value of your assets and holding quality assets over the long term will produce favorable investment results.
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