Leading up to the current month, growth around the world lead by the developed world still seemed in relative cruise control, the end stages of August however have seen the market reeling on the back of further concerns about China’s economic slowdown as well as the devaluation of the Chinese yuan. The events of the last few days have really dominated headlines and have take any focus squarely away from the period leading up to now. Australia’s stocks plunged by the most since 2009 on Monday 24 August and similar patterns were evidenced around the world. Monday’s events saw the following;
- The US stock market has suffered its biggest sell-off in four years. The Dow Jones ended the day down 588 points, having shed more than 1,000 points in early trading.
- The S&P 500 and Nasdaq are both in correction territory tonight, down 10% on their recent peaks.
- In London, almost £74bn was wiped off the value of the FTSE 100 index, in a rout led by mining giants.
- European stock markets suffered their worst days trading since 2011.
- The selloff began in Asia 19 hours prior, where Australia’s market suffered its biggest fall since 2009 and Japan’s Nikkei slumped over 4%.
- But China was the worst hit, with the Shanghai composite index dropping 8,5% in the biggest selloff since 2007.
While on the face of it, it would be easy to conclude that markets are in free fall, analyst such as El-Erian, former CEO of Pimco, has sternly expressed that he doesn’t believe we’re heading into a major crisis, rather an unpleasant repricing. He did acknowledge that it is going to cut quite deep, but that it was not going to derail the economy in a major way.
Much anticipation was surrounding the following day’s trade to see if the markets would dive lower. The focal point China, did continue down to cap off a four-day plunge at 22 percent down. Australia on the other hand seemingly failed to take notice and bucked the trend to finish strong denying the lead from China at 2.7 per cent up at close on Tuesday. Australia was not totally alone amongst Asian stock markets in gaining however, Singapore’s market were up 0.8 per cent and Malaysia’s 0.9; Korea was also up 0.9 per cent, while Taiwan’s market was up 3.6 per cent.
Craig James, Chief Economist at Commsec headed an article he wrote, ‘The correction we had to have?’ In that article he points out some important observations;
- On May 21 2015 the world sharemarket – the Morgan Stanley Capital Index – hit a record high of 1810.8. In the period since the MSCI has fallen by 8.8 per cent. Last year the MSCI hit an all-time high of 1764.1 on July 3 2014 and fell 9.7 per cent over the period to October 16 2014. Four months later the MSCI had recovered from the lows and set new record highs.
- In short, it is always important for investors to determine whether large movements on global sharemarkets are responses to ‘fundamentals’ or whether investors are merely responding to uncertainty.
- In the current environment, investors are uncertain about the direction of the Chinese economy, US interest rates, the situation in Greece and falling global oil prices. It is also important to note that recent falls on global markets are from highs and that valuations on some markets had become stretched.
- If we compare the forward price earnings ratio of the US S&P 500 to its decade average, the market had become around 18 per cent over-valued before the recent correction. In Europe, the forward price earnings ratio of the Euro STOXX in July had become 21 per cent higher than the decade average. And in Australia, the FactSet data suggests that the All Ordinaries index was around 10 per cent higher than the decade average back in July.
- At its peak levels in mid-June, the forward price earnings ratio for the Chinese sharemarket (data on Shenzhen A index available over time from FactSet) hit a high of 46; more than double the long-term average for in the index.
- At present we would view the global sharemarket correction as a correction we had to have – a situation that will be beneficial in injecting more value into markets. There are clearly risks, but the data indicates that US and European economies continue to recover; lower oil prices will serve to boost consumer and business spending; and Chinese authorities are trying a range a measures to maintain momentum in their economy.
- We have not adjusted our sharemarket targets. They are under review, but new estimates will be determined once the domestic profit-reporting season concludes.
While volatility is expected to remain for some time yet, there seems to be more positive sentiment moving back into the market off the back of fairy significant falls. Many investors seem to be seeing it as an opportune time to be buying back into the market at most reasonable valuations.
Wearden, G (25 August 15). The Guardian: ‘Closing summary: China sends world market into a spin’ [Online Blog]. Retrieved August 26, 2015, from; http://www.theguardian.com/business/live/2015/aug/24/global-stocks-sell-off-deepens-as-panic-grips-markets-live#block-55db82aee4b0ca7d700e69e8
Heath, M. Scott, J. (26 August 15). MSN: ‘Big-winner Australia shudders as China rout darkens outlook’ Retrieved August 26, 2015, from; http://www.msn.com/en-au/money/news/big-winner-australia-shudders-as-china-rout-darkens-outlook/ar-BBm66pB?li=AA54Gb
James, C. (24 August 15). Commsec, Economic Insights: ‘The correction we had to have.’ Retrieved August 26, 2015, from; https://www.commsec.com.au/content/dam/EN/ResearchNews/ECO_Insights_2408.pdf
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