Investing

Q21: What’s Alan Kohler on about?

TV Finance reports and how to interpret them

Every night on the TV news we get the finance report. My favourite presenter is Alan Kohler on the ABC. He provides a good summation of the day’s finance news and often adds a quirky, interesting piece that gives a different view on what’s happening in the world of money.

But what are the reports actually saying? Is it important that the Australian share market went up by 43 points or that gold fell $12.50 in late London trade? In this post, we’ll explain the nightly finance roundup and the bits you should be paying attention to.

The Australian sharemarket

The day’s sharemarket action generally makes a good story, because there’s always a company whose shares have jumped around a bit that day. This week an example was St Barbara which announced a lower gold output at its mine and the share price dropped nearly 30% in one day. I always imagine how investors who lost a third of their money must be feeling. (They’re probably wishing their portfolio was properly diversified.) 

Also mentioned is the level of the All Ordinaries Index (called the “All Ords” by those in the industry). This is a measure of the total value of the top 500 companies on the sharemarket on any one day. As we go to print the value was 6,280. The value itself doesn’t mean a lot; rather it’s the percentage change between two points in time that’s important. Often mentioned in tandem with the All Ordinaries is the S&P/ASX200. This is a measure of the top 200 shares’ value and, like the All Ords, it’s not so much about the actual number but its change from day to day. 

While it’s nice to know these numbers, the amount of information they contain for the long-term investor is small. Fluctuations in markets over a one-day time period should be regarded as just noise in the long-term movement of share prices.

Major offshore sharemarkets

The report will also note the value and movement of overseas sharemarket indices such as the Dow Jones or S&P 500 from the US, the FTSE100 from the UK, Japan’s Nikkei or the European Eurostoxx. The reports about the European and US sharemarkets are from the day previous since our timezone is ahead of theirs, so there’s not much information in them. 

The US is the biggest sharemarket so it has a great influence on the course of market movements in other countries. The local market in Australia has to wait until the morning to see what influence the overnight US market action will have. Overseas markets are important because they might dictate the direction of trading in the local market the following day.

As with the local market report, a one-day change in the offshore sharemarkets should not be a big influence on a long-term investor’s decisions. All investors should be diversified into offshore markets, but any price action in the short-term shouldn’t worry you too much.

Currencies

Movements in currencies make interesting news. As the value of the Australian dollar varies against other currencies the buying power of our money changes. Currency valuations can be a measure of the relative strength of our economy or can be influenced by changes in interest rates both here and abroad. 

The foreign exchange market is the best example of a completely free market: there are a lot of traders in it, it’s trading almost continuously, and information flows freely as news is disseminated instantly by global networks. Foreign exchange markets make for great news stories because they move quickly and, occasionally, by large amounts. 

One thing to look for in the movement of our dollar against other currencies is that when the Australian dollar falls in value it makes our exports cheaper to foreigners in their currency. It costs them less in their own money to pay our exporters so it can give a boost to our economy by increasing our exports. At the same time,​ it makes our imports more expensive, which is potentially negative for our​ economy if we can’t find any locally-made substitutes for the imported goods but positive if we can. 

Should you worry too much about the currency markets? If you’re an importer or an exporter, then it’s possible. If you’re a regular investor, then probably not, especially in the short term. If you’re planning a holiday to the US and the Aussie dollar drops from 0.71 to 0.69 your expenses will increase by about 3%. Unless you’re planning on spending a few hundred thousand dollars overseas the currency should be the least of your worries. At most, you’ve added one good restaurant meal to your total expenses.

Commodities

The prices of mining and agricultural products are an indicator of the strength of the global economy. When prices for coal, iron ore and copper rise it’s usually because demand for them has risen. That means more large manufacturing or building projects are under way and the flow of money through the world economy should increase. That’s a good sign. The markets actually refer to “Dr Copper” because its price is a very reliable indicator of the health of the world economy. 

In general there’s some worthy news in the movement of commodity prices but, again, it’s the long-term that a serious investor should be concerned with.

Special news

I like Alan Kohler’s reports because he often manages to find some special news or an interesting chart to show a different perspective on the financial news. His recent comments on the production of plastics since the 1970s gave a fascinating insight into manufacturing. These stories usually explain long-term trends or give interesting perspectives on finance that are not obvious to the casual observer.

Overall

The news cycle and the expectation of some sort of content in the nightly updates dictate that the financial news should report on the one-day movement in market prices. To the long-term investor (as opposed to the short-term speculator) these news stories should be seen as an interesting backdrop, rather than a decision-making tool. In fact, by the time it’s made the news the market has already reacted, so there’s nothing that can be done to capitalise on anything you see on the TV after the markets have closed. 

It’s especially important to look to the long-term and keep a focus on your investment goals when the news reports show a major negative movement in markets. Don’t be scared into a panic by news of a market correction. Corrections, by their very nature, are characterised by sharp price movements. The news loves to report a 20% one-day crash; it rarely reports on a 20% rise that takes six months. 

TMQ readers will know that long-term trends are what is important to investors, not short-term market fluctuations. 

Remember this when watching the nightly finance report: the news loves to report the noise. It’s more exciting.

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