The last week has seen the Australian share market slip back a little but the trend appears to be one of consolidation. The market lost 37 per cent from its February peak to its March 23 low. That was an oversold position and a quick rebound saw it recover about a third of its losses.
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This was broadly in line with overseas share markets. Now the All Ordinaries stands about 27 per cent below its February high. This provides an excellent buying opportunity for longer term investors.
Short term traders and speculators are a nuisance for long term investors as their frequent rushing in and out of positions creates extra unnecessary volatility. Now long term investors have an opportunity to take advantage of traders.
Those trading emotional reactions short term have caused most share prices to fall below their long-term value. People investing for years should do very well buying now. There are even opportunities for those with a one-year time frame.
Capital gains tax must be paid on the whole of gains made within twelve months but if investments are held for more than a year tax is only payable on half the gains.
There is a very high probability that share prices will rise strongly over the next one to two years. Firstly, Australian and global economies will recover over that time and companies will rebuild their profitable operations.
Secondly governments worldwide are dramatically increasing their spending to stimulate economic activity. Central banks are also increasing the money in circulation to ensure liquid funds are available to those who can use them.
Thirdly interest rates are at record lows and inflation is also extremely low. Due to the slump, rates will stay low for longer. Fixed deposits will provide minimal return to investors and borrowing will remain cheap.
A simple strategy for investors is to buy large, blue chip stocks that have fallen sharply in value and wait for their recovery. Companies could include the big four banks, BHP, Sydney Airport, Macquarie Group and Qantas.
Over the next year this should provide healthy returns even if the companies' profits aren't expected to grow strongly beyond the recovery period.
Another strategy is to seek out companies that are not only trading at a big discount but also likely to grow their profits strongly. Companies could include Amcor, Altium, Breville, Tassal Group, Austal and Service Stream.
For those who aren't confident to select individual shares directly, there are many professionally managed share funds that should profit as well or better.
Remember to lobby our leaders to get the West Back to Work!
Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.
