News

Ask Dr Dave

DRS View

IMHO

Computers & Business

Legal Angles

Practice Tips

The Apothecary

Yarns

Golf

Wine

Yoga

Personal Finance

Splitting Assests after Divorce

Tax Changes to Provide Opportunities

Share Market Outlook - Dec 1998

Bear Market?

The Share Market - Where Now? (Aug 98)

Big Changes for DIY Super

Outlook - Feb 1998

Divorce and Superannuation

DIY Super?

Gearing into the Sharemarket

Is there a Housing Boom?

Knock-on Effect

Negative Gearing:Shares Versus Property

New Approach to Negative Gearing

Putting Money into your Spouse's Super

Risk

Share Market Gearing Packages

Soverign Risk

Last Modified 31/10/98

The long anticipated bear market is finally upon us. While some are yet to be convinced, it seems reasonably clear that share prices for the time being at least are headed south. There will be ups and downs in the coming months as the message starts to sink in but the overall trend will be down.

The big questions are how far will they go, how fast will they fall and how long will it last? History is not much of a guide. In the past some bear markets have run their course within twelve months. Prices have fallen a long way in a short period and the pain, although intense, is over quickly. In others share prices have languished, tossed on a sea of indifference for years. It is too early to say what we can expect. What happens internationally of course is crucial - more so than ever before.

Asia is down the gurgler, Japan is in deep recession, China is looking shaky and Russia is a basket case. Europe is travelling OK at present but it is inward looking. European monetary union takes place next year and the efforts of the policy makers are directed at making the change as smooth as possible - the rest of the world can wait.

Policy decisions will make all the difference. If there are serious mistakes then recession could easily spread to the rest of the world. Unfortunately in the US, Russia and Japan, political leadership is under a cloud and attention is focused elsewhere. Mistakes could easily be made.

At the same time the search is on for new solutions. How do small countries deal with the huge flows of international capital than can rush in and rush out at the click of a computer mouse? A number of countries such as Malaysia have made the decision to cut themselves off from the rest of the world. Others could follow suit, which in the long run will be disastrous for world economic growth.

Another possible solution is a suggestion that small countries band together and form an international speculative fund of their own, one that can counterbalance the power of the huge hedge funds that have been blamed for much of what has happened. With perhaps inside information they may be in a position to take on the hedge funds at their own game and at the very least they would increase the risk of speculation.

In the meantime investors are faced with a number of possible outcomes. At one extreme is a worldwide meltdown sparking recession and even disinflation in most of the major economies. Although few economists see this happening, the risks are there and increase if policy is bad. At the other extreme is the view that the worst is over and that the Asian economies including Japan will bounce back within 12 months. The third possibility is somewhere in between.

So what opportunities are around in a worst case scenario? If there is a recession and disinflation, interest rates, share prices and property prices will all fall. In these circumstances cash will be king; as prices fall its value will increase. Fixed interest investments will also perform exceedingly well. As interest rates fall, bond prices rise giving investors substantive capital gains. At some point of course markets will stabilise and the opportunities for bottom feeding will increase.

Those with access to cash should be able to do well. The trick is determining when the bottom, the real one, has been reached. In the more optimistic scenario the opportunities for bottom feeding should be around now. Many companies, particularly the smaller ones, have lost considerable ground over the past year or so and should do better when the market turns around. Offshore too there are bargains in Asia if you believe the worst is now over.

As a half-way house, listed property trusts and other companies paying high dividends tend to be more stable in a bear market. Residential property is more tricky. When inflation is low, prices can be extremely variable. In many areas of Australia house prices continue to fall despite interest rates at record lows. In others, prices are rising strongly. If we are near the end of the bad news then there may be some good buying, providing you are selective.

For the more cautious investor, it is a time of wait and see and of adopting investment polices that give some flexibility.

David Tomlinson
Finance journalist