Anton Tagliaferro and Hugh Giddy comment on the recent sharemarket correction 

5 February 2010

In line with other global sharemarkets, the Australian sharemarket has come off almost 10% from the highs reached in early January - is it time to panic or sell?

Anton Tagliaferro, Investment Director at IML says "Many sectors of the sharemarket have had a fantastic run since the March lows and the stocks that have led the rally have been many cyclical and Resource stocks. The big run in these stocks was based on the consensus view that the global economy was in the early stages of an economic recovery which would strengthen into 2010. We have always had a problem with this as in our view much of the recovery we saw in 2009 was fuelled by large spending by Governements around the world and that once this fiscal stimulus was withdrawn, the economic recovery would also slow. It seems that sharemarkets now are also coming round to this view. While our portfolios are impacted by the current falls, we have maintained a defensive stance for some time. The only new stock we have bought for our portfolios in recent months has been CSL, which is now in our top ten holdings - CSL is debt free and looks very good value in our view."

Anton added: "The balance of our portfolio is very heavily skewed towards dividend paying Industrials where we are confident the good yield they pay can now be maintained - such as the major banks, Fosters, APA and Metcash. This strategy has worked well in previous downturns and should hopefully protect our portfolios to some extent from the current fallout in the sharemarket. While the major Australian banks are currently falling heavily due to the turmoil in credit markets caused by the Greek and Portuguese Governments problems in issuing debt, we expect Australian banks to find a level  soon  at which they will stabilise soon as they are all approaching dividend yields of over 5% which in the past has always seen them find support particularly given that the outlook for Australian banks for the next couple of years looks reasonable."

Hugh Giddy, IML's recently appointed Senior Portfolio Manager commented that "Anton and I have been cautious on the Resource sector for a while. There were early warning signs such as high stockpiles and a significant decline in freight rates yet the speculative hot money continued to indiscriminately chase the sector.  It is not a sector we will be rushing into given that the global growth outlook remains fragile. The team and I continue to trawl the sharemarket for good quality Industrial stocks that could well be unduly sold down in the current environment.  Perhaps the sharemarket is finally moving into a more rational stage where sensible, cautious stockpickers will come to the fore again - a situation that we are all looking forward to at IML." 

You may also be interested in this extract from John Collett’s recent article in The Age on Wednesday the 3rd of February titled “Sure and steady in volatile times”

“Successful fund managers, such as Perpetual and Investors Mutual, have an investment philosophy that focuses on capital preservation and on investing in income-paying investments with the aim of delivering consistent total returns of regular income and capital growth. Such an approach means the fund manager is unlikely to appear at the very top of performance league tables in any year but instead will provide the unit holders in their share funds with higher returns in the long run. Individual investors would do well to follow their lead. The smoother ride provided by a lower-returning, income-paying investment will also help ensure investors stay invested.”