Tuesday, June 24, 2008

Australian Stock Market Weakness A Buying Opportunity?

The Australian Stock Market is approaching a three month low this week. After a brief rally it's all doom and gloom once more - just in time for the end of the financial year. So does this mean it's a good time to buy Australian shares?

I guess it depends on your time frame and your outlook. If you're a long-term investor or a fan of value investing, then these sorts of conditions are right up your alley. But if you're a speculator looking to make a quick buck, it might be a little risky.

I suspect that one of the reasons for the recent share price weakness, apart from the obvious ongoing turmoil in the debt markets, is the fast approaching end of the financial (tax) year. At this time of year some investor like to look back on the profits they've taken during the year then look at their portfolio to find any losses they might be sitting on. By selling out of any losing positions, they can crystallize their loss for tax purposes and offset this loss against other gains.

If you're thinking of engaging in the above strategy you'll need to be careful. There are situations where the Australian Taxation Office take a dim view of this sort of activity. I think the problem arises when you sell the buy back in straight away and the only purpose of the transaction is to generate a tax loss. Make sure you talk to a tax professional if you're considering doing this.

Apparently one of the other reasons for volatility at this time of year is because the fund managers are re-balancing or 'window dressing' their portfolios. I dare say the the Superannuation Funds are very busy right now trying to salvage some sort respectable result.

Another way of looking at the current state of the markets is as a second chance. For those of us who hadn't bought everything we wanted to before the recent recovery, it means we get another bite at the cherry. I certainly thought that prices were recovering and that I'd missed the low point. Now we all get a second chance to top up our portfolios with good quality Australian stocks.