The ASX has declined by 6% since mid May. The US Capital S & P 500 Index has increased by over 12% since the beginning of May, yet the US economy is supposedly struggling compared to Australia’s resilient economy.

Is the downturn temporary or is it the old situation of “sell in May and go away”.

We see three problem areas currently affecting our share market. Firstly and most obvious area is the selling of investments by foreign investors. International investors poured money into our market particularly from June last year when they could obtain yields between 6 and 8% from Australia’s biggest industrial and financial companies. The investments that saw most capital appreciation were the big four banks (CBA, WBC, NAB & ANZ) and of course Telstra. As result of the huge amount of offshore buying which start in June last year the ownership of Australian shares by foreign investors increased 10% above the long term average.

However, since mid May there has been a big reversal as the Australian market has started to weaken against the US Dollar. The volatile Australian DollarWhat's happening to the Australian share market has also been weakened by the slowly improving US economy and the ongoing likelihood that the US Federal Reserve could stop or at least slow the printing of money.

Investors have started to buy the US Dollar and sell Australian shares. The Chinese economy is definitely affecting the Australian share market. This has been an absolute disaster for our commodity prices.  Majority of our solid Australian mining companies are heavily reliable on China spending.  As steel production continues to decrease, iron ore, our most exported commodity has become the biggest causality. Take a company like Fortescue Metals (FMG) who are heavily geared into Iron Ore and has witnessed the price of the shares reduced by an astonishing 40% from mid February.

The third reason our Australian share market has witnessed a downturn is our domestic economy. Despite the cut in interest rates by the RBA, industries such as retail and transport have all reported declines in activity this calendar year.

Australian consumers are paying down debt very quickly and saving 10% of their income since the GFC hit in mid November 2007.

David Jones, one of our leading retail department stores shares have decreased by 19% and Toll Holdings who are this countries biggest transport operator has declined by 21%.

Certainly there doesn’t appear to be any confidence by businesses or consumers. Hence businesses and consumers are not spending the way they were over the past 3 – 4 years. It’s going to be very hard for our resource sector to bounce back, at least not until China starts to improve. Whilst we believe the short term volatility with our industrial stocks will see a bounce as investors start to seek good quality yield once again.

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Thomas Jacks BCom (Acc), SMSF SpecialistTM, Adv. Dip F.S. (FP)
“I want to be able to assist clients with their investment and retirement planning by providing real strategy advice. It’s my aim to not only help my clients but to educate them by addressing the entire picture” Google Plus

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