Urgent advice for Australian investors: Gottliebsen

This comment is directed to all shareholders in Australia – and that includes most people with superannuation funds plus those who are now incurring hideous losses because of margin loans. And I have a special word for Rio Tinto and BHP shareholders.

I have experienced this sort of fall twice before – in 1960 and 1987. It’s an awful encounter, but it does come to an end. On this occasion, we have had a good lead up to today’s sharemarket tumble, with the market edging down about one third from its 2007 peak and around 22% from its May peak. So a lot of groups have had time to prepare.

Let me describe the process as I see it. What happens in these falls is that there is enormous selling and buyers are hard to find. If you have borrowed on shares and have not eliminated that borrowing you must either pay the margin calls or quit. It is this group of people who are the early sellers as they are thrown out of the market. Many will not return for a decade because they will be deeply scarred by the losses.

But then we will see hedge funds’ money disappearing as, in fright, they are forced to sell.

Many holding superannuation assets will decide to switch out of shares and so funds will be sellers. Those who have been waiting for this opportunity to buy have money at the ready but they won’t hurry. “Let the forced sellers feel maximum pain” is the motto of the buyers. Wall Street closed near its lows and given that there is a real risk of a depression in the US (see my earlier comment) the US market still has a long way to fall.

Our market will be hit hard because two of the most vulnerable areas dominate our market – banks and miners.

I do not believe any of our banks are in danger, but they will all see their profits mauled because of the losses that will come from people who can’t pay their loans and from unfortunate decisions they have made. If there is a run on any bank, the Reserve Bank and the Government are in good shape to ensure that there are no failures and the majors will pick up the pieces.

Our four major banks are among the most highly rated in the world (there are about 250,000 banks around the world and only 18 are AAA-rated according to Mike Smith of the ANZ). Our banks will come through this crisis in a strong position, but it won’t stop their shares being brutalised.

Last night we saw oil, copper and other minerals slump. The initial fall is multiplied by the fact that the hedge funds must liquidate their holdings. The slump in US consumer demand is going to be enormous and it will trigger great global weakness, but just as with the banks the strong mineral groups will come out of this in fine shape.

So what should shareholders do? I cannot assure you that today is the bottom of the market. In fact, I think Wall Street still looks way too high and there was no time last night for the full impact of the blunder by some of world’s worst politicians – the US Congress – to sink in.

But the companies that get through the crisis – and not all will – will emerge on the other side as profit powerhouses. As in 1960 and 1987, those who can stand the share falls will be fine, and indeed will make a lot of money.

Of course I was not around in 1929 when recovery took a lot longer. Clearly that is a risk. But frankly this does not feel like 1929 to me because I believe that in a different form, the US rescue package will be implemented using a process that has already started – the US Government will stand behind the deposits and let the bank shareholders swing.

Eventually we will have a small number of huge American banks. But while the share market will bounce back from the lows, the US economy will stay down for years. And so will our economy, so whatever you do, don’t expect a return to a strong economy for at least two years and maybe a lot longer.

And in essence that’s what the sharemarket is telling us.

For BHP and Rio Tinto shareholders, your stocks are being hammered because this global catastrophe is hitting the commodity market hard. The DVD interview that was recorded and sent out to shareholders (you can read the full transcript here) sets out the views of BHP chairman Don Argus and CEO Marius Kloppers, though it was recorded before the US bailout rejections. Rio Tinto had the same view. Now, in the short term, the game has changed.

But longer term, the world will dig its way out of this by massive investment in infrastructure, led by China. And that will underpin the demand for resources. Moreover, funding new projects will be made tougher by the banking crisis.

Kloppers’ view has been that if there was a slump in minerals it would make it easier to gain control of Rio Tinto assuming the European Commission was not too tough. That view is now going to be tested, although I think he is right. We are going to see a dramatic world consolidation in many areas, led by banking. Minerals will really only be in catch up mode. But Rio Tinto will continue to argue that it is not getting full value – as it should.

And finally, how should superannuation holders react. If you are young, don’t worry and keep contributing. If you are about to retire, then you are going to need to work longer. I know that sounds harsh, but that is a fact, and it has to be faced.

The tax arrangements for older people working are very attractive. The people I feel sorry for are those who have retired and are now facing much lower income. I really feel for their plight.

It’s a case of lowering your standard of living by taking the Government pension or returning to the work force, if you can. It is not going to be easy, but the best asset you have is your health and your family. And when the sharemarket is passing through days of no hope that applies to everyone.

This article first appeared in Business Spectator

Full coverage: Bailout shock