Markets remain volatile on fears about strength of the economic recovery

There was a lot of news for investors in May. The government’s response to the Henry taxation review and the Federal Budget were announced. The proposed introduction of the Resources Super Profits TAX (RSPT) early in May resulted in substantial share price volatility in the resources sector as investors and analysts attempted to determine the impact of the proposed tax.  The miners, unsurprisingly want to pay less tax and have gone on the attack with an anti-tax advertising campaign. Similarly the government has responded with its own advertising campaign. I am sure the truth is out there somewhere and hopefully cool heads will prevail and a period of consultation will result in some modifications to the proposal. For my money I do not think that the tax will go through in its proposed form and that seems to be the market view. However the uncertainty caused by this RSPT is affecting global perceptions about investment in Australia. With Asia booming I do not believe that mining projects will be stopped but I do think that money will go where it is best treated and the development of some projects will be affected.

I continue to be an investor in the mining sector and I am taking the opportunity to buy more and more quality companies. Certainly European countries with massive debts are going to go through a period of cost cutting and possible high taxes. This will certainly have an impact on those heavily indebted economies. On the other hand the devaluation of the Euro is improving the competitive positions of some European economies like France and Germany. The euro has declined 19% against the USD in the past six months which has helped German exports rise 21% over the last year.

During the month I saw some investors redeeming investments as their fear levels increased. As I have always stated the “share market” is a place made up of buyers and sellers like any market place. When are you most likely to get good value for your investment dollars? The answer is when there are more sellers than buyers resulting in bargains. Unfortunately many investors buy when all things appear rosy at high prices and sell in panic when the market corrects or moves sharply lower. This strategy of buying high and selling low is irrational but is the most common flaw in the individual investors’ approach. I encourage you to maintain your commitment to your long term goals of wealth creation and know that the best investment strategy is not always comfortable.

This is an excerpt of Michael Lannon's monthly commentary. Read the full commentary here.




Michael Lannon
Managing Director