Prepare for rough weather ahead

The plunge in the oil price and substantial reductions in other commodity prices has caught many investors by surprise. The worst affected have been investors both small and large in energy and resource companies, where shares have fallen in value and are unlikely to rebound quickly. Although these developments are being portrayed as bad news for the federal government because of their adverse impact on revenue, the implications for Australian investors could well be of greater concern.
 
Typically, Australian super funds, especially the default funds used by millions of workers, have a high weighting towards Australian shares and other higher-risk assets. As banking shares are also coming under selling pressure because of concern about possible regulatory changes increasing reserving requirements, the poor performance of the resource sector will pull superannuation fund returns downward.
 
If, as could happen, the Reserve Bank opts to lower the official interest rate to help stimulate the economy, the other avenues for investors to obtain acceptable returns from their savings will also be reduced. There's now increasing speculation that the lower commodity prices will result in the Australian dollar falling in value faster than previously expected. This may please the Reserve Bank, which has been arguing for some time that the dollar was overvalued and needs to fall. For consumers, however, a lower dollar will increase the cost of non-commodity imports at a time when employment opportunities in key sectors of the economy are declining.
 
Along with the government, both large and small resource companies will face serious budgetary challenges. The best hope for investors is that the government delays drastic changes to the reserving requirements of the big four banks and doesn't put the dividend payouts under pressure and add to the problems facing the market.
 
Unlike the share market problems faced during the global financial crisis, this time the share price falls are a response to investor concerns about future profitability of major companies. So far there's no concern about the stability of the world financial system even though the OPEC decision to maintain oil output in the face oversupply will create problems for several major higher-cost producers.
 
As with the oversupply of iron ore, it will take considerable time for production to fall because of the collapse of higher-cost producers. Given the importance of the resources sector in our economy, it's difficult to see a quick recovery of the losses resulting from our falling terms of trade. The clear message for all investors is, they need to ensure that the asset composition and risk profile of their portfolios suits their personal needs. This would help them through what is like to be another weak period in the Australian share market.

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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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