Market Volatility

Major sharemarkets experienced further declines over the course of last week (and today in Australia) over fears such as emerging economies (and their currencies), signs of weak global growth and the ongoing fall in commodity prices to name a few. But is this a sign of worse to come, or a temporary correction in the context of an overall positive trend?

For the week alone, US shares fell 5.8%, Eurozone shares lost 6.7%, Japanese shares fell 5.3%, Australian shares fell 2.7%, and Chinese shares lost 11.5%.

A key factor weighing on markets is fear of a significant slowdown in the Chinese economy, along with their moves to adjust their currency. However it is worth noting that the Chinese slowdown has been to a large extent engineered by China to reign in excessive growth, and there is much scope for stimulatory measures.

Overall, we believe there is a lot to support the view that this is a temporary setback, and investors should remain confident in the longer term outlook. For instance:
• US economic data is still reasonable, and the recent pullback puts shares at a fair valuation relative to bonds. Employment growth is strong, at around 5%.
• European business confidence points to an improved economic outlook.
• The Australian profit reporting season hasn’t dazzled, but the majority of companies have met or exceeded profit forecasts, exceeded previous year profits, and delivered increased dividends. Considering the decline in the mining sector, the story for non-mining is thus quite good (particularly service exports), indicating some transition in the source of growth for the Australian economy.
• Central Banks around the world are set to continue easy monetary conditions to support growth – any talks of tightening in the US are in response to good growth, and should be seen as a positive sign when they eventuate.

With this being a seasonally weak time of year, and in light of the fears noted earlier, it might be expected to see further volatility over the coming few months. However we believe now is a time for clients to stick to their longer term plan and not over-react to the market nervousness. With the longer term positives noted above, we may look back at this period as a buying opportunity, rather than a sign of troubles to come.

As always, please contact us to speak with your adviser with any questions on the above

Published : 24 Aug 2015

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