Share Market Wrap 29th Sept 2006

While the RBA has recently reported that it is a worried about the dramatic increase in borrowings to invest directly in shares and managed funds, they have indicated they are even more concerned by the fact that one third of the loans are secured by a single share.

Securing a margin loan with only one share is exceptionally high risk and something that should never be allowed. No doubt clients are being misled by investment recommendations that benefit the advisor more than the client simply to generate commissions. On average a managed fund generates a return of around 7.5% over any 10 year period, yet the interest payable on a margin loan can be as high as 8%, which means someone is losing. To be frank, you need to be producing returns of around 15% plus per annum to get any real benefit from using a margin loan. 

Furthermore, the number of margin loans have increased five fold over the last seven years, yet in my experience the majority of people do not fully understand the high risk nature of this product, which is evident by the number of margin calls during the June quarter which doubled as a result of the volatility in the market. I have been advising my clients for over 12 months to reduce their loan to value ratios to just 50% to avoid this situation. 

So what’s happening on the market?

 Last week I indicated that I was expecting the All Ords to rise this week, and continue trading up for the next three weeks to around 15 October. So far this week the market has risen strongly, particularly on Wednesday when it rose 99 points, which means we can confirm that the All Ords will be bullish to around 15 October. I also believe there is a high probability that the market will trade above the previous peak of 5125.60 achieved on 6 September and continue on to achieve my earlier target of around 5200 points.