INVESTMENT NEWS - Investment Advice

The Examiner: Keep your cool, stick with shares

AMID the screaming newspaper head- lines and frenzied TV reports, it pays to tune out the hysteria and listen to a calming voice of reason about the current stockmarket softening.

Finance expert Professor Tim Brailsford says corrections are normal and, as you’ll see in an article on Page 2, famed investor, Warren Buffett, says investors should welcome corrections.

“The stockmarket has endured highs and lows, booms and busts, bubbles and bursts for around 200 years now,” says Professor Brailsford, who holds a PhD in finance and a masters degree in economics.

“History tells us that the market will recover – it always does.”

Sufficient data exists to confidently show stocks beat bonds and many other investment assets over long horizons, says the professor at University of Queensland’s business school.

“More specifically, if we carve up the last 100-plus years into 10-year intervals, stocks have invariably beat bonds in these sub-periods.”

“Excellent” dividend yields further support the desirability of Australian equities, Professor Brailsford says.

“Combined with the dividend imputation tax credit, Aussie franked dividends offer a very competitive yield compared to their overseas counterparts; and to date there have been no systematic reductions in payouts.

Hence, for a long-term investor, the dividend stream can be compared favourably to a coupon stream from fixed interest, and the regular cash inflow arguably dulls the pain of the current capital losses.”

Another cool head is Australian Shareholders Association chairman John Curry who says that, particularly in Australia, “things aren't as bad as they appear to be”.

“I'd say don't panic, particularly those in retirement who have 15 or 20 years,” Mr Curry advised, speaking on ABC television recently.

“They've seen this all before, and they know that in the longer tell markets will sort themselves out.

“I think we have to remember that for about the four years prior to this year there was about an average of 20 per cent a year increase in their portfolios; so one must expect that there'll be some downturn every so often.”

Professor Brailsford says some analysts are advising that the sell-off of Australian big resources and banking stocks has been too extreme and they now represent bargains.

“Take the resources sector for example where the commodities boom is riding off the back of huge increases in demand from places such as India and China,” he says.

“Economic growth in both of those economies will sustain strong demand for commodities such as coal and iron ore for several years to come.

“Consequently, it is argued that the recent falls in BHP and Rio Tinto are an over-reaction to the general financial conditions.

“Similarly, the Aussie banks have been marked down despite the calls from those supposedly with the inside knowledge that our banks are fundamentally sound.”

If you agree with the above arguments, then now looks as good a time as any over recent years to enter the market, Professor Brailsford says.“Certainly by historical standards, forward price-to-earnings multiples appear on the low side.”

But, he stresses, that depends upon corporate earnings holding up.

Professor Brailsford also advises that the bumpy ride in global equity markets will continue for a while but that “governments will intervene in an attempt to restore some stability”.

He also says “central banks will look to monetary policy as a mechanism to stimulate demand. That is, expect interest rate cuts going forward”.

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