Market Volatility Rises whilst ACCC Blocks Merger

Uncertainty among investors has heightened over the past few weeks, and when the market is uncertain, volatility rises. This comes as no surprise as volatility always increases in reporting season , but after consolidating sideways for a period of time, it has now risen.

It is also not surprising that volatility is higher, given that we are approaching the Federal election and many are speculating about what the market will do if the Government changes. On top of the election and reporting season, we also have the Reserve Bank’s unexpected decision to keep interest rates on hold rather than reduce them.

The RBA met on Tuesday and despite pressures to cut interest rates, they held them steady at 1.5 per cent, which I believe is a wise move prior to the election. Maybe this is a good sign, given that the Reserve bank reduced rates with the last two changes in Government.

Speculation is rife that the Australian market will fall heavily if the Government changes on Election Day, but attempting to determine the direction of the market based on an election result is a waste of time. No Government has the ability to effect change in the overall direction of a market quickly. Currently, our market is bullish and will continue to be so in the medium term no matter who is in power.

As I alluded to previously, what is important to consider is investor confidence in our market, and it is imperative for either party to instil confidence around the globe in our ability to be strong economic managers. Our market benefits greatly from foreign investment, and in order for that to happen there must be stability in our economy, and confidence that our Government is stable.

ACCC scupper telco merger

In other news, the $15 billion dollar Vodafone-TPG merger once again came under fire from the ACCC this week. Rod Sims, the chairman of the ACCC, expressed concerns about the over concentration in the industry, which he claims would be detrimental to consumers.

In contrast, I believe that this merger would be a good move for the Telcos as it will lead to more competition in the industry, challenge the current Telstra, Optus duopoly and ultimately open up more opportunity for better pricing and better services for consumers. It’s no secret that Australians are overpaying for telecommunication services, yet we are experiencing lower standards in the delivery of these services than many other countries around the world. The NBN role out is just one example of paying high fees for poor service.

An interesting play this week came as Treasury Wines (TWE) was heavily sold off after accusations by a US fund manager for over inflating sales figures. At the same time, the CEO sold off some of his shares, which resulted in the stock being down as much as 12% on Wednesday.

The US fund manager has a short position in TWE, and you have to question the intent of the speculative accusation. Is it possible this could be a stunt by the fund manager to manipulate the stock price in their favour, as the timing and details of the accusation are interesting?

While most of the market was in the red, the Utilities sector was the best performer this week up around 2%. The worst sectors were Consumer Staples and Information technology, which were down 2 and 3% respectively. Of the top 200 stocks, Domain rose over 10% to trade to its highest level since October last year despite being one of last week’s worst performers. Northern Star also reversed its fortunes up over 8%.

The worst performers in the top 200 were Adelaide Brighton and Graincorp, which were both down over 14%.

So what do we expect in the market?
The All Ordinaries Index, as expected, continued to trade down, which is a good sign for the market, as it is just finding support in preparation for future gains. The Australian stock market has been extremely bullish since the start of this year given that it is up over 18%. In normal bull market conditions, we would see a move down over consecutive weeks roughly every 3 months, so this is nothing out of the ordinary. I believe our market will most likely fall below 6,300 points in the next week or two and that this down move will provide the springboard for a sustained move up above 6,500 points into June.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au