Recently we have seen significant negative movements in local and global share markets, culminating in the worst single day of trading for our market since January 2009 on Monday. Volatility such as this can test even the most seasoned investor and this is why here at First Financial we aim to succinctly update you on what is actually occurring.
What is causing the volatility?
There are a number of factors contributing to the wild swings:
The Chinese economy is showing signs of weakness which has undermined commodity prices including iron ore, copper and oil.
The Chinese financial system has been very volatile. The Chinese stock market is suffering a hangover from a steep rise in the previous 12 months fuelled by a buying frenzy.
Locally our reporting season has been uninspiring. Many Australian companies are providing soft guidance for the 2016 fiscal year and this has seen sell-offs in a broad range of stocks.
Our banking sector delivering low single digit earnings growth whilst also being laden with increased regulatory requirements.
5. The ongoing uncertainty around any potential rate rise in the US and the impact such a rise could have on anticipated growth not only for the US but for many emerging economies as well.
What is going to happen then?
The short answer is we do not have a crystal ball, however it is likely some of the following may occur:
Global share market volatility levels to remain high.
Chinese policy makers pushing for more sustainable levels of growth for a nation transitioning to a consumer led economy. This in turn will likely mean lower growth out of China.
Locally, we expect low levels of earnings growth to continue into FY16 before picking up in FY17 and beyond. In the short term the attractiveness of franked dividends in a low interest rate environment coupled with a lower AUD should provide support to our market.
Speculation of further capital raisings by our banks in the near term may weigh on the banking sector as well as the overall market.
High levels of supply from global miners and oil and gas producers will continue to act as a headwind to our Materials and Energy sectors.
The Fed eventually raising rates in the US. We see the raising of rates as fundamentally a positive for equity markets.
So where to from here?
This is not the first downturn or period of extreme volatility that we have been though (corrections of 10-15% are not uncommon in equity markets) and unfortunately it won’t be the last. The best approach is to have a plan that allows you to deal with these unfortunate negative periods.
At First Financial our investment philosophy is focused on your cash flow requirements and is designed to ensure you have cash in your hand when you need it.
We aim to not be forced sellers of investments, particularly when markets are depressed. This allows the well managed quality companies you are invested in to recover following market downturns.