On Friday last week the Australian sharemarket (S&P/ASX 200) closed down by 2.8% in response to a falling US sharemarket.
What factors have driven the sell-off?
The fall in Australian and offshore equity markets since the start of October can be attributed to a number of factors:
- The trade tensions between the US and China don’t appear to be moving to a resolution in the near term.
- This month the International Monetary Fund downgraded its expectations for global growth. Global growth is now projected to be 3.7% for both 2018 and 2019 – 0.2% lower than the previous forecast in April. The context around these changes is important. It appears downside risks to global growth are increasing whilst capacity for upside surprise is diminishing.
- In late September the US Federal Reserve increased the official cash rate in the US (the Fed Funds rate) by 0.25%. The US Fed Funds rate is now 2.25% after the third 0.25% increase this year and the market is expecting the FED to raise rates again in December.
- Rising bond yields in both Australia and the US. In the US the 10 year bond yield has moved from 2.81% in August up to 3.13%. Similarly, the Australian 10 year bond yield has risen from 2.52% to 2.63%. Rising bond yields tend to negatively impact equity valuations as the opportunity cost of being in equities increases as bond yields move higher.
- So-called “growth stocks” in both the US and Australian equity markets are being repriced by investors after strong gains during 2018. US reporting season has highlighted higher input costs after years of tailwinds, the USD has appreciated and US wage growth and inflation increasing which will impact earnings growth and therefore share prices and multiples.
- With volatile markets and falling share prices investors remain sensitive to company profit results, earnings guidance and events such as the upcoming mid-term elections in the United States.
Don’t get caught up in the media ‘hype’
In times of increased market volatility it is important for investors to focus on the long term strategy. Typically, media headlines can dramatise market falls with attention grabbing lines such as “$40 billion dollars was wiped off share market values today”. Such reporting is targeted to invoke an emotional response and get people to read, listen or watch a report. When markets are rising it is far less common to see market gains being reported in “billions of dollars” but rather point moves on an index or a percentage gain.
Australian Unity’s view
Our investment philosophy is focused on longer term investment rather than short-term market timing. We ensure portfolios are well-diversified, utilising expert fund managers and we seek to move away from over-valued assets and invest in under-valued assets with this longer term investment horizon in mind. This is an approach that works well in volatile markets and being well diversified and valuation focused ensures an investment portfolio’s ability to withstand more volatile market conditions. The utilisation of expert fund managers along with adhering to our investment strategy means we are focused on exploiting any longer term valuation misalignment rather than reacting to short-term factors and risk selling assets at the bottom of a market correction or aggressively buying at market peaks.
Looking forward, company balance sheets are moderately geared and the earnings environment remains robust. There are no obvious pre-conditions to a market crash apparent. However, it is important to understand markets do oscillate and go through periods where value is re-calibrated by investors. There are risks and the market is re-pricing risk into share prices at this juncture. Ultimately, this will provide an opportunity. We remain positive about the medium to longer term outlook for equity markets, however expect moderate gains in markets over the next few years when compared to the last 5 years. Importantly, if you have any concerns, please contact your Adviser who will be more than willing to help.