Carnival over, but it's not all gloom

After the GFC's devastation of our retirement savings, five good years of high investment returns had restored the savings and the confidence of superannuation fund investors. However, in the past month, both the sharemarket and the Australian dollar have dropped in value by more than 5 percent, with the possibility of further falls as commodity prices, especially iron ore, continue to fall.

With the sharemarket retreating to this year's starting level, super fund investors must be wondering if the party is over. The hardest-hit sectors of the sharemarket have been the major banks and large miners, despite their strong earnings performances and higher dividend payouts.

The pressure on bank shares is coming from three sources. First, leading analysts are advising investors to take their profits while the share prices are at record highs. Second, there's concern that the Murray Financial System Inquiry will recommend that the banks be forced to increase their capital reserves by issuing new shares. Third, hedge funds and other traders are seizing the opportunity to profit from these two factors to short sell bank shares.

With the dollar falling in value as well as the shares, this presents an additional incentive to short sell Australian assets and buy them back at a later date. Several commentators have also highlighted the increase in longer-term interest rates after quantitative easing ended in the US. This may be a factor encouraging foreign investors who own a largepercentage of our major companies to take their profits before the dollar falls further.

Despite all this, unless there's a major plunge in the value of the Australian dollar, the imputation credit system will ensure that dividend yields from our leading shares continue to exceed the returns from Australian term deposits and quality company debt.

Just what will happen with our sharemarket from here is far from certain. However, the prospects for the economy are strong and the impact of falling commodity prices will be cushioned, especially if the Australian dollar continues to weaken.

The sharemarket will continue to be supported by investors including super fundsseeking yields higher than those available from the alternative options, including fixed interest and property. Also, with the recent surge in property prices, the risks of new property purchases are now considerably higher than they have been for some time.

As with all investment decisions, share investors need to be aware of the potential risks of market volatility. With prices still high, there is time to adjust portfolios and risk profiles to lock in the gains of the past few years, especially if the portfolio is overweight in Australian shares, as many are.

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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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