With growing optimism that world economic growth is increasing, the outlook for share investors is positive, with a strong possibility that the Australian market could reach the record highs of 10 years ago. Helping our market along is the prospect that, unlike overseas where interest rates have begun rising again, a weakening property market and a buoyant Australian dollar will limit the Reserve Bank's ability to increase the official cash rate.
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Despite the encouragement to offshore investments from the strong dollar, Australian shares paying fully franked dividends continue to be supported by yield-seeking institutions and personal investors. For superannuation fund investors particularly, the refund of franking credits at the current 30 per cent company tax rate enhances the ownership of local quality equities.
While not highlighted by the government, the legislation to reduce the company tax rate for large companies to 25 per cent will reduce the benefits of the imputation system by increasing investor tax bills or reducing tax refunds for non-taxable pension funds. Currently the legislation is languishing in parliament and may not see the light of day for some time, even with the competitive pressure of substantially lower overseas company tax rates.
The painful experience for many share investors is that what goes up can also fall in value. With world share markets all at or near peak levels, there's naturally a concern about an impending downturn. Making new investments involves considerable risks when valuations are high, as they are currently, and there's also a continuing concern about protecting gains by locking in profits.
The lessons from the 1987 and the GFC crisis market crashes is that quality diversified profitable companies will recover in value even if they fall during a crash. Indeed, the prices of quality shares can fall faster than speculative and lower quality shares because of their greater liquidity.
Investors in general tend to be reluctant to trigger losses when forced to sell and instead opt to sell higher quality shares which still have capital gains attached. In practice, if part of a portfolio must be sold to obtain cash or reduce debt, the best strategy is to liquidate holdings with the worst prospects.
Weeding out portfolios is most effectively achieved when markets are strong, as they are now. The better the market performs, the more important and easier it is to shed poorly performing and more speculative assets. The cruel history of the 1987 market collapse is that many of the highly popular and speculative issues didn't survive the crash.
Given how well our market has been performing, now is the time to review portfolios and make appropriate adjustments to protect profits while taking advantage of the good times while they last.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
