November 2001 Volume 82 Number 11 "serving the protectors"
Shares
By Ruth McCance, ASX Investor Education

Dealing with uncertain investment markets

While financial markets continue to be volatile since the recent tragedy in the US, history suggests that it is economic fundamentals, not events, that drive markets in the long term. The key unknown is how long a cloud will remain over the markets. Careful navigation and a return to the basic rules of share investing can help to carry us through this new phase in the investment cycle.

Long-term investors generally want their money in successful and profitable companies. Aside from a company’s management etc. there are a number of factors outside its control that influence its ability to generate revenue. Generally, a predicted fall in interest rates is good news for the sharemarket and a predicted rise may have a negative impact. However, the impact on a specific company may be due to the amount of interest it has to pay on debt or, if it is a lender, the likelihood of people defaulting on loans. Global economic circumstances can affect share prices. For example, if a national economy moves into recession, then a company that has major customers in that country might find it harder to increase profits.

Headlines about global recession, military action or political crisis can cause investors to panic. It is not always easy to hold onto an investment strategy as the news gets worse and there are substantial falls in the sharemarket. However, historically an initial fall after a crisis has given way to a substantial recovery, though past performance is no guarantee of the future. Here are examples of the US Market Recovery after tragedy. (Source: Stocks-Standard & Poor’s 500(r), which is an unmanaged group of securities and considered to be representative of the stock market in general)
December 7, 1941 - Pearl Harbor
The market immediately dropped -17.1%, at 1 year it rose by 20.3% after 3 years the market rose 81.4%.
August 2, 1990 - Iraq invades Kuwait
The market fell -4.9% after 1 month, after 3 years it rose 57.7%.
Feb 26, 1993 - World Trade Center bombed
Market dropped -0.5%, after 1 year rose 8.3%, after three years a rise to 56.6%.

The aftermath of the current crisis has shown investment fundamentals still to be at work. Companies and sectors, which are perceived to be at risk of reduced profits, have been heavily sold and “safe havens” bought. An example of this is the insurance sector. Not all insurance companies stand to be adversely affected: Suncorp Metway, for example, made an announcement on 12 September 2001, advising that it had no insurance exposure to the tragic events in the US. Despite this, its share price fell along with the rest of the sector in the first few days, but then recovered. QBE Insurance Group Limited on the other hand has made numerous company announcements since Sept 12 estimating and then revising its level of exposure, causing its share price to react with considerable volatility. QBE’s share price on close September 12 was $9.45. By 20 September its share price fell to a two-year low of $3.35. After the company reminded investors on 28 September of its sound capital base and high levels of provisioning to cover its liabilities the price rose to $5.75.

The money taken out of insurance may have flowed to perceived “safe havens”. Anthony Grant of Salomon Smith Barney said that “income yielding stocks have been popular, such as listed property trusts, particularly the office and diversified sectors with yields of around 8%pa. Utility stocks such as Australian Pipeline Trust on a yield of 9% pa, and the Healthcare sector with Mayne, Resmed and Ramsay Health to name a few.”

The question is what do we do now? ASX asked financial adviser, Andrew Wielandt of Macquarie Financial Services - “If you are investing in blue chips shares with a long-term view, and you are comfortable with the fundamentals of the company then you would hold, but you need to look at your risk profile, goals and objectives to make sure the companies in your portfolio are still meeting these requirements”. In other words, the basic principles of investing still apply.

This article contains general information only. It is not intended as and must not be relied upon as investment advice. You should consult a licensed professional advisor prior to making any investment decision.

The information contained in this article is provided in good faith and derived from sources believed to be accurate as at the date of publication. However, no warranty of accuracy or reliability as to such information is given. Australian Stock Exchange Limited and its associated and related companies will not be liable for any loss or damage arising in any way from or in connection with anything provided in or omitted from this article or from any action taken or inaction in reliance on the article. This article does not contain an invitation or offer to invest in securities or other financial products and nothing in this article is to be taken as ASX endorsing promoting or expressing any opinion on any securities or other financial products.

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