Market movements - June 2008

The investment market update

Sharemarket stalwarts take a hit

Over the last few months, the movements of the Australian markets have failed to instil much comfort in the minds of investors, with no sign of calm returning any time soon.

Since May, the All Ordinaries Index has fallen from a level of 6,006 points to 5,476 points as at 16 June, a decline of some nine per cent. Major contributors to the deterioration in investor sentiment were concerns over rising oil prices (which recently touched almost US$140 per barrel), and further sub-prime related asset write-downs from international banks.

Compounding these events was the negative performance of banking stocks - previous stalwarts of the Australian sharemarket - suffering at the hands of a market which has instead been overwhelmingly favouring resources. The banking sector, which formally accounted for 25 per cent of the market in 2004, has seen its share of the index shrink to less than 18 per cent currently.

Most of the banks' shares are trading at levels not seen since 2004 or 2005. ANZ Bank shares and National Australia Bank shares are both down 41 per cent from their 52-week highs set in October and November last year. The Commonwealth Bank share price is 35 per cent down from its peak in November and Westpac Bank is down a significant 31 per cent from its 52-week high.

Another well documented casualty on the Australian sharemarket is listed investment company, Babcock & Brown. This top 50 ASX listed company, has seen its price plummet by 70 per cent in the space of just one month following concerns regarding their level of debt and the complexity of their business model.

While these issues have been expressed regarding Babcock & Brown’s structure and operations, there is no doubt that the heightened level of risk aversion arising from the US sub-prime crisis and global credit crunch has contributed to the sharp sell-off in the company.

Although the All Ordinaries Index is a good measure of how the market is on average performing, it's worth keeping in mind that because it is an average, it can obscure the 'pain' that is actually being felt by companies at an individual stock or sector level. In actual fact, the overall index has been propped up by very large positive contributions from the resources sector. Strip the resources out and the index is looking exceedingly malnourished.

But it's not all doom and gloom. On a more positive note, the Reserve Bank of Australia has hinted for the first time that it might have done enough with its interest rate hikes to slow consumer demand, with a comment that "the bulk of the indicators" suggest domestic demand is moderating. This statement has reduced somewhat the expectations for further interest rate rises and might provide some relief to indebted homeowners and long suffering share market investors.¹

1. Reserve Bank of Australia (RBA), Minutes of the Monetary Policy Meeting of the Board, 3 June 2008 http://www.rba.gov.au/MonetaryPolicy/RBABoardMinutes/2008/rba_board_min_03062008.html

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