What the heck is going on in the share market: time to panic?

After a positive few weeks in the lead up to Christmas the financial markets have turned very negative in the first 3 weeks of 2016 with share markets globally falling almost every day.

Reasons for this aren’t entirely clear but commonly cited reasons are the continuing fall in commodity prices, in particular oil, concerns about Chinese economic growth and uncertainty as to the consequences of anticipated interest rate increases in the USA. Other factors mentioned include a fall in the value of high yield bonds, problems in emerging markets such as Brazil, Turkey & South Africa, and declining volumes of world trade.

In the case of Australia, in addition to the pain of substantially lower prices for many of our major exports, such as iron ore and coal, there are many predicting the end of the housing boom and possibly falling house prices over the next few years. Growth in personal incomes is reportedly at a 50 year low.

None of these explanations of the current share market downturn reveal anything new or unexpected and my view is that this correction is much more about a change in sentiment rather than any meaningful recent change in the fundamentals.

Economic growth in the US, Europe and Japan remains positive, though still lower than Governments would like, and in Australia we have seen solid job growth which doesn’t suggest a recession is near at hand. Yes Chinese growth continues to slow but at 6.9% (or whatever the real number is) a “hard landing” there still seems unlikely anytime soon.

Low oil prices hurt producing countries, like Saudi Arabia, Nigeria, Canada, Russia, Venezuela and the like but the other side of the coin is that lower prices are good for consumers and manufacturers and should boost economic growth in the rest of the world.

It is worth noting that there is no panic in the broader financial markets, in particular the global banking and payments system, as we experienced in 2008. This could be summarised by saying that what we have currently is “a growth scare rather than a credit scare”.

The World Bank has recently reduced its forecast for global GDP growth in 2016 from +3.3% to +2.9% and the International Monetary Fund has cut its forecast from +3.6% to +3.4%.

Volatility in share markets is quite common and it is always worrisome to investors when the news headlines seem all negative but it is important to keep sight of fundamentals and not to simply be caught up unduly in the negative sentiment.

When reading headlines like Royal Bank of Scotland analyst Andrew Roberts saying that global markets look similar to 2008 and that you should sell everything, it is worth noting that he did not predict the 2008 market meltdown and he has been incorrectly predicting disaster over the last 6 years. Meanwhile share markets are up substantially.

There are undoubtedly some challenges that Australia and the major world economies face and negative sentiment may see further falls in the near term but, unless the fundamentals deteriorate significantly, I don’t think there’s any reason to panic. I’m not anticipating great returns for any asset classes in 2016 but hopefully later this year we’ll be looking back at this time as a buying opportunity for share market investors.

What should I do as an investor?

For now, stay calm and focused on your personal goals. We are closely monitoring markets and taking a hard look at fundamental factors. If we believe that changes need to be made to your portfolio, we will contact you directly. If you have experienced any life changes or shifts in your perspectives on risk, please let us know.

Market Volatility

Many investors become concerned when volatility occurs in global financial markets –particularly about the impact on their superannuation and other investments. In times like these, it is important to understand the causes of market movements and how to minimise your risk.

In times of market volatility your super balance may decline, but it is important to remember that markets move in cycles. Volatility is a natural part of the economic cycle. Markets are influenced by a range of factors and are inherently unpredictable. The Australian Securities & Investments Commission (ASIC) states that, “negative returns from time to time are not inconsistent with successful long-term investment”2. History demonstrates that over the long term, the general trend of share markets has been upward.

Don’t lose sight of the bigger picture

Super is a long term investment. Shares, which usually form a large part of most balanced super accounts, are also generally a long term investment. They are designed to provide capital growth over a period of five years or more. Think in years, not days. The time frame for super may be 20 years or more, so short term volatility shouldn’t diminish the long term potential of your investments. Growth assets (such as shares) tend to fluctuate in the short term, but have historically provided excellent returns for investors over the long term. When share markets fall in value, it may be tempting to sell up. However, trying to time the market by selling now and buying back later is a risky strategy that rarely results in investors coming out ahead. By taking a long term view of investing, you can ride out any short term fluctuations in the market and take advantage of growth opportunities over the long term.

Diversification

Diversification is one of the most effective ways of managing volatility. It can help deliver smoother, more consistent results over time. Your investment may benefit by being spread across a variety of asset classes, including shares (domestic and global), fixed income, cash, direct and listed property and alternatives. This diversification should help soften the effects of any share market falls as some asset classes often tend to do well whilst others are struggling. Also, spreading your assets around means you are less reliant on any one asset class at any particular time.

Understanding the implications of withdrawing

Before you withdraw from an investment you should understand all the implications, risks and costs involved.

  • Crystallising losses. If the value of your investment is falling, you are technically only making a loss on paper. A rise in prices could soon return your investment to profit without you doing anything. Selling your investment makes any losses real and irreversible.
  • Incurring capital gains tax (CGT). Make sure you know what your CGT position will be before selling any asset.
  • Losing the benefits of compounding. If you’re thinking about making a partial withdrawal from an investment, remember that it’s not just the withdrawal you lose, but all future earnings and interest on that amount.

Key takeaways to keep in mind:

  • Super is a long term investment designed to generate sufficient money so you can enjoy your retirement.
  • Diversification is an important part of a long term investment strategy.
  • In retirement, it may be necessary to invest in growth assets like shares so that your returns stay ahead of tax and inflation.
  • It may be beneficial to ride out the bad times in order to achieve long term growth.
  • Your financial plan was designed exclusively for you to suit your investment objectives and risk profile. It’s important to stay focused on your long term goals

 

  1. ASIC, Regulatory Guide 191, Superannuation: Helping investors look at longer term returns—ASIC’s best practice guide, July 2008, pg 4.

 

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

Share This