Standing firm against the odds

AUSTRALIAN share prices have so far stood up manfully amid the slaughter on world stock markets.

According to research house InTech, the average Australian fund manager who stuck to local stocks in the past financial year outperformed international stock pickers by a whopping 18 per cent. On the other hand, Australian institutions that ploughed money into foreign parts recently are looking very blue.

They will not be bailed out this time by the crumpled Aussie dollar. The currency has been wandering around the US51 cents level for several months, forming some sort of base.

Those smug fund advertisers telling us on TV how dumb we are for putting our money in a market that represents less than 2 per cent of global capitalisation might pipe down for a while. But I doubt it.

Geographical diversification of risk always has a nice sensible ring to it. They did not stress you could be buying into more risk in the US, Europe and especially Asia.

Many people might have been better off looking after their own investments, provided they held a wide spread of local blue chips.

What the Commonwealth Bank calls its Mum’s and Dad’s index of 10 popular stocks is up 9.8 per cent since July 2000, handsomely outperforming the All Ordinaries Index, which was down 0.5 per cent for the period. Granted, two million Telstra holders have been blowing bubbles and AMP has been dragging its feet, but the Moms and Pops have done well in Woolworths, Suncorp Metway and NRMA, and avoided stepping into those manholes marked “high tech stocks”.

Western Australians who added Wesfarmers to their list last year have done considerably better.

However, pride goes before a fall. July is supposed to be a good month for Australian shares. It did not work out that way this year. In the latter half of the month the market got the willies. Deeper clouds over global growth and the surprise jump in June quarter inflation spooked investors.

As to the first worry, it is worth recalling that the Australian economy sailed through the hideous 1998 Asian crisis with GDP growth undented at 4 per cent. The disaster which struck our neighbours fortuitously came at a time when consumer spending was strong and interest rates were at their lowest for a generation. It is not fanciful to suggest that, without the Asian downturn, growth could have shot through 5 per cent or even 6 per cent, creating a renewed interest rate squeeze and a boom to bust scenario.

This time around, we are again looking at 4 per cent growth in the year ahead. Only a few weeks ago the RBA was able to hint that there was room to clip interest rates more if a global recession came over the horizon. The latest 0.8 per cent jump in consumer prices signals an annualised 5.25 per cent rise in inflation, and seems to put the kibosh on those hopes. Core inflation is nudging the top of the 2 per cent to 3 per cent RBA tolerance band.

Analysts say the driver for hotter inflation is a new-found ability of companies to pass on price increases, particularly in imported goods, to their customers. That should mean repaired margins and higher profits for businesses big and small, and ultimately climbing share prices.

The buoyancy in the new house and refurbishing sectors is continuing and business investment figures are surprisingly good, HSBC economist John Edwards says.

“If you look at the numbers, our exports to Japan and ASEAN have held up remarkably well so we have not actually seen the beginning of a downturn yet,” he says.

The trouble is, those spoilsports in the bond market have sent the return on 10-year paper shooting through 6 per cent. That makes yields in the equity market look puny, which is why shares in the big banks stocks have been dragged out for a pummelling. Investment fads swing around so much these days that long-term investors would do better to put their feet up and ignore the noise.

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