Quality Aussie shares providing attractive returns

While predicting share market movements is difficult at the best of times, fears of a major downturn now are not warranted. If anything, the recent sharp daily market falls are a necessary result of the rapid increase in prices over the past year.

Even after recent falls, our ASX 200 index is more than 20 per cent higher than a year ago. In Australian-dollar terms, world share markets have increased by the same or much larger percentage terms over the past year.

These sustained increases in share prices are the result of worldwide quantitative easing and low interest rate policies. Australia may reduce rates even further in coming months, especially if the dollar stabilises around current levels.

The problem associated with the falling dollar is that it could bring with it inflationary pressures because of our reliance on imported consumer and industrial items. Also, there are signs the most recent interest rate reduction has boosted middle and higher quality residential property prices.

This could make it more difficult for the Reserve Bank to cut rates further. Even after the 20 per cent rise in average share prices, quality equities are providing higher returns than fixed interest and residential property investments. This is why several leading brokers believe there is still room for further share price rises.

In Australia, as elsewhere around the world, investors are taking higher risks to maintain living standards. While the number of investors owning shares continues to fall in Australia, institutions and personal investors are increasing exposure.

Although critics are now saying the share prices of the higher-dividend payers, including the banks and Telstra, are overpriced because of price increases of up to 50 per cent, the yields are still attractive. Even if earnings do not increase substantially in coming years, the dividend returns including franking credits are sufficiently high to encourage buying by income seekers.

Real problems for the market are likely to occur only when rates start to rise again or if the economy suffers from falling commodity prices. If, as it seems is happening, the exchange rate moves down with commodity prices, the worst impact on our exporting companies will be cushioned by a falling dollar. If commodity prices were to fall but the dollar stays at or around the current level, the impact on the economy and share prices would be much more severe.While there’s likely to be more volatility, our market is being underpinned by attractive returns for income seekers.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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