Sydney view: Experts stumped by what comes after the big fall

By GILES PARKINSON

One of the most alarming aspects of the slide that has shaken global share markets in the past fortnight has been the pundits' complete inability to make sense of what it means for the future.

According to some estimates, some US$6 trillion - that's US$6000 billion ($12,785 billion) - of wealth has been wiped out by Wall St's near 50 per cent fall from its peaks of early 2000.

The effect on consumer confidence - and how that affects investment decisions - is what is making it difficult for the experts to predict when the slump may end and when, or if, the market may rebound.

Those with experience in such matters - that is, in 1973, 1987 and 1998 - point to data that suggests there have never been more than two consecutive years of share market falls, and the 100-year history of sharemarket capitalism shows that the market will always rebound.

But the prognostications of economists and market strategists in the past fortnight have been none-too-convincing. "Aaarrrggghhh" was the headline for one strategist's report this week.

The cause of his anguish? How to value the loss of faith caused by a string of corporate scandals and the attitude of investors who have nothing to show from the greatest bull run in history.

"Fear is the dominant influence on Wall St right now and, as such, valuations based on earnings and fundamentals are secondary influences only," NAB strategists said in a separate report on Wednesday.

Chartists are not helping either. These seem to be obsessive people like Jack Nicholson's character Melvin in As Good As It Gets. Melvin didn't like to walk on the lines between pavement stones.

There was something wrong with him, but he spent his life disguising it, an analogy for the current state of the market.

Chartists, though, think that their science cuts through the mystery. It's just that some of their findings are scary and suggest the markets, at least in the US, have a long way to fall yet.

But not everyone has lost or expects to lose their shirt. The Australian Foundation Investment Company, a publicly listed investment company with strong links to broking house JBWere, is a case in point.

In a year in which Australia's top 300 stocks lost 4.5 per cent in value (after taking into account dividend payments) and the top 50 lost 6.8 per cent, AFIC was one of the few investment managers to chalk up a gain - and make a return of 3.1 per cent for its shareholders, even after paying tax, management expenses and other costs.

Chairman Bruce Teele, a veteran of the Australian stock market, described it as an "unusual" year, marked by concerns about economic uncertainty, terrorist attacks, corporate reporting scandals and high market valuations.

"This was an environment which, in our view, warranted caution," he noted, without a hint of irony.

It still is a time of great caution. Teele says AFIC will keep its conservative investment style and the buy-and-hold strategy that has served it well.

"We are still looking for opportunities to buy quality companies as and when market setbacks provide opportunities to buy them at attractive prices," he says, noting some buying points have yet to be reached.

The AFIC portfolio makes interesting reading.

It's weighted heavily towards solid, yield-paying blue chips. NAB, Westpac and CBA head the list, followed by Wesfarmers, BHP, ANZ, Amcor and Telstra.

Other stocks to appear on the top 20 list are ANZ, Southcorp, Foster's, Woolworths, Coles, Brambles, CSR, WA Newspapers, Toll Holdings, AMP, James Hardie, St George and Suncorp Metway.

A solid yield play to the last.

* Giles Parkinson is deputy editor, new media, of the Australian Financial Review.