Trade Wars, an Election and Tax Loss Selling – May 2019


The ASX200 Index closed the month of May up 1.13% in what is now the fifth consecutive month of positive gains to be trading at its highest level since December 2007. The Aussie market is a whisker away from all-time highs and roughly an 18.46% rally since Christmas Eve. However, it’s quite a different story in global markets which are facing headwinds from escalating US / China trade war negotiations. Both effects are dampening market sentiment and global economic activity. As a result, the Dow Jones Industrial Index closed the month down 6.69% and the S&P500 was down 6.58%. The US government upped tariffs on $200bn of Chinese goods to 25% from 10% and China responded by increasing tariffs on $60bn of imports from the US. European markets fell in similar fashion with the French CAC down 6.78% and FTSE down 3.46%. Chinese markets also felt the heat, falling 5.83%.

On the local bourse, the clear standout sectors were the Telecommunications sector led primarily by Telstra which launched the country’s first 5G mobile device, the HTC 5G Hub. Shares also surged on the back of the government’s ban on China’s Huawei equipping Australia’s 5G networks. The US administration has also blacklisted Huawei on security fears. Following the post-election bull-run, the Australian market dipped back towards the 6,300 level before regaining composure to close above 6,400. The stellar market run is also a result of the shock win for the Liberal-National Coalition party. The win not only boosts business confidence in the economy but it removes uncertainty around changes to excess franking credits, changes to negative gearing / capital gains tax and all the negative headwinds that will have followed. The win was well received by markets.

As expected the RBA slashed rates by 25bps to its lowest point, 1.25%. While CBA and NAB passed on the rate cut, ANZ and Westpac will pocket $193m by electing to not pass on the full rate cut. Leading economists are tipping that another rate cut could be on the table next year, due to ongoing concerns on a weakening property market.

June Market Outlook

It’s good old tax loss selling month. With the end of the financial year just around the corner, investors often take advantage of a tax loss selling technique to offset any capital gains they may have incurred during the financial year. Basically it means to offload your losers to generate a capital loss that will help offset any capital gains. The interesting phenomenon this creates is a wave of selling that starts early June and continues into the third week of June. Illiquid stocks are sometimes hit even harder as investors move to offload them prior to the end of the year.

Work Desk

The good news is that the month of July is almost always a positive one as investor’s buyback the stocks that were sold pushing prices higher. The rally in July can sometimes last three weeks as stocks can recover by between 10% to 30%. Of course the ATO has certain rules around ‘wash sales’ which try and prevent investors from doing this. As a result, it’s worth keeping an eye out for any potential tax loss selling that may occur over the first two weeks of June.