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Market Updates  -  June / July 2011
The more things change ......  (the Carbon Tax)

By Robin Bowerman
Smart Investing
15th July  2011
Principal & Head of Retail, Vanguard Investments Australia

Long-term plans at times come with short-term impacts.

Take a certain carbon tax proposal as an example.

It does not come into effect - all things politically going to plan - until next July. Its true measure of success will not be known until 2050 by which time Australia's carbon emissions are predicted to be reduced by 80 percent compared with the level calculated in 2000.

So we have to wait the best part of four decades to declare it a success (or otherwise) - that certainly satisfies the test for investing for the long-term.

But naturally amidst the claim and counter-claim of the political debate swirling around the federal government's carbon tax announcement investors are grappling with what it all means for businesses, household costs and investment portfolios.

Long-term structural economic reform of this type clearly can have significant impact so it is not surprising the focus is on identifying potential winners and losers.

The person many regard as the father of modern share investing - Benjamin Graham - once declared that in the short run the stockmarket is a voting machine, in the long-term it is a weighing machine.

Certainly there are a lot of short-term votes being cast at the moment as the government's complex tax and compensation measures are digested and analysed.

If the focus is on an individual company then the impact may be a little or a lot. But if we take a view of the Australian sharemarket as a whole then history suggests markets evolve and adapt and over time continue to grow.

When we look at the Australian market over the past decade the composition of the market as measured by the broad S&P/ASX300 index shows us how the nature and the drivers of our sharemarket has changed.

If we compare the main sectors that make up the index at the end of June 1999 the largest sector was financials (excluding property trusts) at 31.4 percent. Next was the materials sector (which includes mining companies) and third was the consumer discretionary sector that covers the major retailers.

Jump forward to end of June this year and while financials and materials are still the two biggest sectors in our market there have been some notable changes in the lower ranks. The consumer discretionary sector has dropped from 14.2 percent of the market to less than 4 percent; telecommunication services slipped from 10.2 percent of the index in 1999 to 3.4 percent this year.

The energy sector - which includes the major oil and gas companies - represented 2.7 percent of the index back in 1999. In June 2011 it is up to 7.4 percent. The health care sector has also seen strong growth.

So the sharemarket has evolved and adapted as the business and economic environment changed.

And when you look back over 30 years our markets and businesses have had to adapt to a lot of significant change: the floating of the Australian dollar, reductions in tariffs with strong impacts on our manufacturing sector, the introduction of a capital gains tax, a fringe benefits tax and a goods and services tax.

So the message is that markets adapt to the new reality and putting a price on carbon is unlikely to be an exception.

But for investors these periods of change do introduce arguably different levels of risk. At a specific security level the risk of a long-term re-rating - either positive or negative - is real enough. As always the odds of picking winners are stacked against you so diversification is possibly even more important in periods of significant structural change.

And of course times like this remind us of the other great risk that as investors we all bear - legislative risk. Public policy can - and almost certainly will - change with governments of different idealogies.

In that sense the more things change the more they stay the same.



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