Are stock markets globally likely to fall much further?

The Australian share market has fallen 10% so far during the December quarter, slightly less than the fall of nearly 15% in the S&P500 US stock market index.  France, Germany, the UK and Japan have all fallen between 10% and 13% and China’s CSI 300 index is down 10 %. This has clearly been a global sell-off.

Key concerns in markets have been a fear of rising interest rates in the US, leading to a slowdown or even a recession in 2020, the China-US trade war, and signs of weakening economic growth in China & Europe. Other negatives include increased Brexit uncertainties and, in Australia, fears of a weakening economy on the back of house price falls.

It is quite possible that we will see further share price falls in coming months if the evidence grows that the things worrying markets are getting worse, but it is also possible, though less likely in my view, that the outlook will improve and markets stabilize or even rise. The US market took no comfort from the Fed raising rates another 0.25% overnight, ignoring Trump’s criticism, and indicating that potentially two 0.25% rate hikes are likely in 2019. The Fed also indicated that it will continue to withdraw liquidity from the market. The more “hawkish” tone from the Fed than the market hoped for was not well received.

I retain my view that a degree of caution, but not any panicked overreaction, is warranted until some of the uncertainties that have potentially serious negative consequences play out.

What about the US-China Trade War?

Not much has changed in the past month and the U.S.-China trade war is unlikely to end anytime soon. As I have previously said, what the White House is demanding in negotiations, Beijing can’t concede without abandoning the state-led economic model that it thinks it needs to both achieve its longer-term strategic goals and to address economic challenges at home. And, the signs are that the Chinese economy is softening. With neither Trump or Xe willing to concede much ground, the trade war may get worse in coming months. This is one of the key things financial markets are now factoring into (lower) stock prices.

Some better news: Superannuation – Downsizer superannuation contributions

The new downsizer superannuation contribution provisions, which are now effective, provide an opportunity for older eligible Australians to sell their home and make an additional contribution to superannuation even if over age 65 and not working or with a total super balance of $1.6m or more. The contribution is not assessed against your contribution caps. We are starting to see clients take advantage of this.

If the amount is used to commence a superannuation income stream (pension), earnings that accrue on this amount are taxed at 0% rather than your personal marginal tax rate which could be higher. Income (pension) payments received are also tax-free as you must be over age 60. Lump sum withdrawals can be made which are also received tax-free.

There are, some important rules to be eligible to make a downsizer contribution, including the following:

  • You must be aged 65 or over at the time the contribution is made.
  • The contribution must be from the proceeds of the sale of a single eligible property in Australia.
  • You must have owned the property for at least 10 years prior to the sale.
  • The contract for sale of the property must be entered into on or after 1 July 2018.
  • You must not have previously made a downsizer contribution in relation to the sale of another property treated as your main residence.

 

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.

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