Downturn time to act with caution

After breaking 10-year highs, the Australian share market has retreated to lower levels as investors become increasingly concerned about the impact of trade wars and emerging market problems. Normally market downturns present buying opportunities but this time, despite official projections of continuing economic growth, investors are worried about higher inflation and market distortions if the trade wars intensify.

The falling Australian dollar is helping to reduce the adverse impact of falling metal prices triggered by lower Chinese demand but overall our major exporters are facing tougher times. Major bank share prices have fallen as investors react to the royal commission and higher offshore borrowing costs.

Market movements will depend on whether US markets hold up at near-record-high levels. Despite the havoc that could result froman escalation of the tradewars, the US economy is not heavily reliant on international trade for its prosperity. The effect of rising interest rates and lower bond prices on the demand for shares will be a more important factor if the Federal Reserve proceeds with its foreshadowed rate increases.

Proposed changes in the imputation credit system affecting pension funds and low-income investors don’t augur well for continuing investor support for higher yielding fully-franked dividend-paying shares. Investors affected by the change will be forced to accept dividend yields up to 40 per cent less than are currently available or seek alternative investments.

Until there’s certainty about taxation arrangements after the next election, prudent investors will be cautious about making new commitments and taking the opportunity to take profits while the current rules still apply.

World share markets could face similar pressures as investors opt to take advantage of still high valuations and take profits. At an individual level, investors with portfolios overweight in Australian shares because of the high yields available from franked dividends will be reviewing their options.

While the proposed tax changes will affect the dividend yields of only up to 15 per cent of current investors, this could reduce the demand for and price of popular franked dividend paying shares.

If the market continues to retreat, additional selling pressure from investors affected by the imputation tax changes will result in lower returns for share investors. Now is a good time for investors to review the suitability of their share investments for their long-term needs.

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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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