We are now currently seeing swings in the equity market better than the bowling of James Anderson in the recent Ashes cricket series. Like the Australian batsman, equity markets have been very volatile over the last couple of months. This is being driven by an ongoing contraction in China’s manufacturing sector, turbulence in Europe and now a falling Australian share market it’s no surprise investors are starting to ask…where to next?
We are seeing a similar situation now that we did back in 2011, however then it was Greece defaults and the US reaching their debt ceiling. Then we saw a 22% fall in the local market. Now, it’s China in particular impacting on Australian markets, and also currency – the AUD/GBP has risen to around $2.15 / £0.47 for the first time in many years. The Chinese share market went berserk earlier this year, and is now back at the level it started 2015 at. As we know, generally speaking the Chinese do like to gamble (as do Australians … I’m a little over how many gambling ads we see on TV), and not being able to do so within the confines of China (and not everyone can hop across to Macau) has seen the levels of borrowing to invest in shares rise sharply. As margin calls hit when the market falls, this promotes more selling.
Locally, the fall in the Australian market has been particularly stark;
- down nearly 1.5% on Friday 21 August;
- down over 4.0% yesterday (at close, 24 August);
- possible falls today however the market has recovered after an initial dip;
- having fallen 15% since its high in April 2015.
Share prices of banks, resources and energy companies have been hit hardest, not surprising for the resource sector given China’s import levels of our commodities. Earnings growth, especially for the banks, has been difficult to come by and falling commodity and energy prices have impacted the ongoing viability of a range of projects for local miners.
While it is inevitable that short-term volatility and market drawdowns can cause angst for investors, it is not all bad. It is important to remember that with volatility also comes opportunity and this period of weakness has been no exception.
The Australian equity market now looks better value than it has for some time. Despite the current valuation, we believe a selective and focused approach remains key to uncovering great opportunities. For income buyers you are seeing some of the best yields in years – it’s easier to find gross returns, safe yields, up around 8 to 9 per cent. For those investing for growth – it’s similarly an opportunity for long-term investors. That’s not to say that this – approx. 5,000-point level on the ASX – is the bottom There could be further downside from here however we expect to see some support for the market at this level given the above point on yield (income) alone.
We expect more volatility in both global and domestic investment markets driven by:
- the timing of the US Federal Reserve’s decision on interest rates (expected in 3-4 weeks … no change to interest rates will be a positive for the markets);
- European stability;
- questions around Chinese growth; and
- ongoing weakness in commodity prices, especially iron ore and energy.
But within this noise, we see considerable opportunity and believe that the outlook for an investment in Australian shares remains positive.
Author: Mark O’Loughlan
Partner – Senior Adviser
References:
Macquarie Investment Management
James Kirby (Eureka Report)