Take a chance at the margins

IF we're at or near the bottom of this share price rout, then borrowing to invest and preparing for the eventual rising market makes sense.

Take a chance at the margins

WITH the stock market down 18 per cent since November 1, sending trainloads of highly leveraged investors to the cleaners, a timely question needs to be asked.

With the market at these attractive levels, should we now think about a margin loan?

I know many of you are asking if I have lost my marbles to pose such a question, with companies such as Allco and Tricom nearly razed to the ground because of punters going long in the margin loans game?

I concede it is a courageous inquiry but it could be argued that if we're at or near the bottom of this share price rout, then getting more exposure to the eventual rising market could make sense.

To those who think the sell-off has been overdone and are scratching their heads over why our economic links to China have not protected our stockmarket plays, positioning yourself for a market rebound seems logical. And if this happens dabbling with a margin loan could be a smart play.

Certainly making investment life harder is the Reserve Bank of Australia, which is hellbent on crushing inflation as it heads to 4 per cent.

The big bank is resolved to orchestrate a slowdown to KO inflation by squeezing borrowers' dwindling bank balances through rapid-fire interest rate rises.

This has to hurt local companies and has to be reflected in the current weaker share prices.

But if we are near the bottom of this share price slump, why not get more of the positive days ahead by gambling on margin loan products?

How does it work?

For the novice investor, margin loans can mean you get to borrow between 30-70 per cent of any shares you might have your eye on.

So if you had $100,000 earmarked for a share portfolio, provided your lender ticks the shares you want, you could buy $200,000 worth of shares and your loan-to-valuation ratio would be 50 per cent.

You borrowed $100,000 - the loan - and you ended up with shares valued at $200,000. You've doubled your upside but you have also doubled your downside if we have a way to go into the land of the big, bad bear.

Before talking to the experts on possible falls or rises ahead, let's complete the economic/market snapshot.

Looking forward

We're still in US company reporting season and Euroland are now spitting out results. These revelations could produce some market-spooking admissions.

The overall assessment of these corporate health report cards could have significant impacts on the direction of the stock market.

Economic results such as US gross domestic product (GDP) are out later this week, but we will have to wait for about six months before we know if the US is in recession now.

One thing I can't get out of my mind is what CommSec's Craig James said last week.

"Eventually equity markets will have to reflect fundamentals such as the domestic economy and profits,'' he advised.

"Valuations are too cheap to support weaker stockmarket levels.''

Canberra-based adviser and margin loan specialist Wayne Lear from Conscious Money thinks it is time for margin loans, but he still preaches caution.

This guy can only be understood from a long-term perspective and that's what drives his interest in margin loans.

"Over the last 100 years it shows bull markets last around 90 months while bear markets go for about 20 months,'' he says.

"I think we are near the bottom but we could be bouncing along the bottom for six-12 months.''

He thinks getting in slowly by targeting defensive blue-chip companies that are good dividend payers is the way to go.

"If someone had, say, $100,000 to invest we could go up to $300,000 and put about 25 per cent in first,'' he suggests.

"If the lender will give you 70 per cent of the portfolio as a loan, I recommend only using 60 per cent to keep a buffer.''

With this strategy in place, his calculations say there would have to be a 22 per cent market fall before you got a margin call. On a portfolio of $500,000 he says a call would be around $3000.

Note that these generalisations assume your portfolio is a good approximation of the market. If someone has picked a collection of mostly smaller company shares that have been creamed by more than the overall market, the margin calls could be like a Stephen King novel.

"What I am saying is that the ASX would have to fall from where it is now around 5500 to say 4400 before you got a margin call,'' Mr Lear says. "And that's highly unlikely.''

The reality is that if this happened we wouldn't be talking about using the R-word for recession but the D-word for depression.

Sydney chartered accountant and boutique fund manager Lance Lai of Accountancy Invest, who is a big chart watcher, thinks there're some market challenges ahead.

"The market has more downside to go,'' he tips. "I think it will fall to 4800 as a low and settle around the 5000 mark in the ASX 200.''

Mr Lai thinks the US-based S&P 500 is heading towards 1144. It's now around 1360, so broadly he's looking at a 15 per cent fall.

Macquarie Bank currency analyst Jo Masters is far from pessimistic. In a recent currency note, she observes the first round of US economic data was not flash and that the Fed is expected to cut interest rates by another 50 basis points in March.

The respected Conference Board report has even predicted that the US won't even go into recession.

"Its chief economist Gail Fosler argued that while the correction in financial sector is just beginning, the correction in the housing sector is almost over,'' Ms Masters says.

"She reminded us that consumer spending is continuing at a 2-2.5 per cent rate, business activity and corporate profits continue to rise and exports are booming.''

And for those looking for positives, Ms Masters has more.

"Importantly, though, taken at face value the Fed's central tendencies do not spell out a protracted recession or a period of the much dreaded stagflation,'' she argues.

"It is not all doom and gloom and the minutes also noted that once the economy stabilised it may be important to rapidly take back the easing.''

Nervous Nellies who want to walk on the wild side with margin loans could wait a tad before diving in but it may not need to be a long sit on the sidelines.