Call Us: (02) 6021 7000

Global share markets fall despite sound fundamentals

25th August 2015

All major share markets have been sold down heavily over recent days. The correction on equity markets has also been accompanied by ongoing falls in the price of commodities and emerging market currencies. Since the beginning of August, Australian shares are down 12%, with losses of 10% to 12% recorded across the United States, Europe and Japan. Chinese shares have declined 14% since the start of the month.

What has caused the market correction?

There appears to have been little change in underlying market fundamentals, with the economic backdrop remaining relatively stable and supportive of modest company earnings growth. Rather, the sell-off seems to have been largely sentiment driven. AMP Capital Chief Economist Dr. Shane Oliver highlights that markets are currently “full of emotion” and characterised by nervousness.
Underpinning the market’s nervousness seems to be increasing concern over the outlook for Chinese economic growth, ongoing weakness in commodity prices and fears that the combination of falling commodity prices and weaker Chinese growth will be particularly problematic for emerging markets. As a result, funds have flowed out of emerging markets causing sharp falls in many emerging economy currencies.

Is it a correction or something worse?

Whilst a fall of the magnitude experienced in recent days was not expected, sharp declines in share markets of up to 20% are not unusual and do not imply there will be an extended period of weakness. In fact, corrections can be a healthy characteristic of “bull” markets, allowing investors to reassess valuations before a rising trend resumes. Dr. Oliver believes that the longer term trend for shares remains upwards, stating that: “Our view remains that the cyclical bull market in shares likely has further to go. Put simply shares are not seeing the sort of conditions that normally precede a new cyclical bear market: shares are not unambiguously overvalued; they are not over loved by investors; uneven and below trend growth is extending the economic expansion cycle; and monetary conditions are likely to remain easy for a while yet.”

Previous market falls that have preceded more extended market downturns tend to have been associated with financial system dysfunction, excessive overvaluation or imminent economic recession. None of these factors appear to be in place today. In particular, the global economy remains on a modest growth path with low inflation and accommodative policy support creating an environment conducive to company profit growth. Locally, the latest profit reporting for the period ending June 30th, confirmed a steady rise in the profitability of Australian non-mining companies of around 7% from the previous year.

Although share market fundamentals may remain sound, share market valuations can move away from fundamentals for extended periods. As such, the latest sell-off suggests that caution is required by investors, particularly around emerging markets. However, with little change in the outlook for underlying company profitability, investors should maintain longer term strategies and asset allocations. In fact, for investors with underweight positions to equities, the current sell-off may represent an opportunity to enter the market. Please do not hesitate to contact your AMPFP adviser should you wish to discuss recent market events or any aspect of your investment strategy.

What you need to know

AMP Financial Planning Pty Ltd ABN 89 051 208 327, AFSL 232706 and Australian Credit Licence 232706. Any advice contained in this brochure is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your financial planner, their practice, AMP Financial Planning Pty Ltd and other companies within the AMP group will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Contact AMP for more details by calling 133 888 or ask your financial planner.

Centrelink Asset Testing: Winners and Losers

William Truong looks at how the Federal Government’s changes to Centrelink’s asset testing from 1 January 2017 will impact people looking at applying for Centrelink allowance. Following the recent Federal budget announcement, the Government has now passed law to give effect to changes to Centrelink’s asset testing from 1 January 2017. Changes to the assetContinue Reading

How Can I Use PROPERTY To Make Me Better Off?

If you’ve built up some equity over the years, it may be time to look at the options your property may give you. Here are four possibilities that PY Financial Services can help you with: 1. You could buy an investment sooner Borrowing against the value of your home—which is one way you can accessContinue Reading

2014 in Review, Look Out 2015!

Economic Update   Wow what a year we have had, it makes it hard to know where to start. 2014 has seen lots of exciting changes in the global economy and at PY Financial Services. 2014 has been a positive but somewhat constrained and messy year for investors and 2015 is likely to see okayContinue Reading

Live the life you want in 2015

You can do it―your health, wealth and happiness can flourish in the New Year. Research shows that new years’ resolutions are worthy of serious consideration—if you make resolutions, you’re 10 times more likely to change things than if you don’t. But 92% of new years’ resolutions fail to be realised according to research. The goodContinue Reading

Am I too young for a self-managed super fund (SMSF)?

Some of my friends in their 30s have set up an SMSF. I don’t have a large super balance but want control. Is it worth it? If you’re under 55 and thinking about setting up a self-managed super fund (SMSF) you’re not alone. SMSFs are being established by younger Australians in a shift in theContinue Reading

Am I better off renting or buying a home?

  It’s a hot topic. The rent-versus-buy debate has been pulled every which way in the media and laid bare in the recent Reserve Bank of Australia report[1]. But when all’s said and done, the possibilities are surprising. In fact, when it comes to where you live, you’re likely to have more options than you’veContinue Reading

Asset Class Returns 1984 to June 2014

Recovery from the Global Financial Crisis (GFC) With people still suffering emotionally with the effects of the GFC it is reassuring to look back on how the market has performed over time to comfort yourself that in time it will go up. As a generalisation most people by now have more then recovered on paperContinue Reading

21 Creative Ways to Save Money

  Pick a bank that gives back. Look for a bank that makes the most sense for you. Seek out perks like no ATM fees, high interest on savings accounts, and no overdraft fees. Smaller banks often offer better interest rates and perks. If your bank doesn’t offer these perks, call them and ask ifContinue Reading

PY Financial Services are an Authorised Representative of AMP Financial Planning Pty Limited, ABN 89 051 208 327, AFS Licence No. 232706.

Any advice contained in this website is of a general nature only and does not constitute personal financial product advice. In preparing the advice no account was taken of the objectives, financial situation or needs of any particular person. Therefore, before making any decision, readers should consider the appropriateness of the advice with regard to their particular objectives, financial situation and needs.