The past few weeks have seen increased volatility and sell offs across global risk markets such as share markets.
This development has particularly impacted emerging markets and currencies, where growing concerns over the economic slowdown in China have put downward pressure on commodity markets, emerging equities markets and caused a global “flight to quality”.
In developed markets the US share index is down 6.3% month-to-date and European equities have fallen approximately 15% from their highs of April 2015.
In the Asia Pacific region, we are seeing China A shares trading at 35% below their 2015 highs (note – these markets were up 150% over the 12 months ending mid-June 2015), Australian shares are down 15% on the same basis and New Zealand shares are down approximately 5%.
However, whilst this volatility is no doubt creating attention, the world economy remains in reasonable shape.
The US, European and Japanese markets are all in recovery mode and China, while slowing, is still likely growing at over 5% in real terms, underpinned by a range of stimulatory policies.
The areas of true recession are Russia and Brazil due to both lower GDP and currencies – note – both of these economies are too small to have an adverse effect on the entire global economy.
Meanwhile growth in Australia and New Zealand is being held back by downward pressure on commodity prices. Taking into account the falls in Australian and New Zealand currencies, the encouraging monetary policies from the Reserve Banks are providing a cushion to maintain acceptable growth rates.
The Chinese economy is going through a difficult adjustment period; transitioning from a manufacturing powerhouse to a consumer led growth model will not happen overnight. Recent China A-share market turbulence and lower commodity prices is not all bad news – this is driving currency weakness which is going to help tourism and import-competing industries and is keeping inflation low, thereby giving the Reserve bank scope to further cut interest rates if required.
The net yield on Australian shares is now 5.1% which is twice the return of interest bearing alternatives such as term deposits.
Markets rise and fall over the short term, as we have recently seen with the Greek “default” – its downward effect on the Australian market and subsequent rebound.
If you are a long term investor it is always best to avoid “knee-jerk” reactions such as selling down assets in times of uncertainty and locking in losses.
Sometimes short-term volatility provides investment opportunities – our view is to maintain current strategy but rest assured we are monitoring the situation.
Should you wish to discuss the situation in further detail please contact our office.
“This document or website contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making an investment decision. Charter Financial Planning Limited and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this document except for liability under statute which cannot be excluded.”