Keeping a cool head when market volatility heats up
Financial markets are back in the headlines for the wrong reasons. A variety of concerns has led to a level of volatility that hasn’t been seen for a number of years.
While this can be unsettling, it is not another Global Financial Crisis (GFC), it is just another bump in the road to recovery that we’ve been on since then. Concerns about China and energy prices are driving the recent volatility and while they are issues to contend with, in some cases, a market pull back is healthy considering their strong rise in the past few years.
Economies too are generally in a better position today than they have been for some time and business balance sheets remain healthy.
Let’s look at some specifics:
- China: The Chinese economy is slowing but it is not a train wreck. The economy is in transition with consumer spending overtaking infrastructure and capital spending as the major growth engine for that economy in future. From an equity market perspective, the Shanghai index more than doubled between October last year and June this year which was clearly unsustainable. A recent halt to controlled stock market buying has created substantial market volatility.
- USA: The world’s largest consumer market is now nearing a sustainable growth path. A stronger labour market, improved sentiment and a better housing market are all signals the central bank has been seeking before starting to increase interest rates. This has been well publicised, but moving from a 0% interest rate to a higher level hasn’t been done before. Given the unknown, investors are taking a more cautious stance, thereby aiding some of the current market volatility.
- Australia: Given our economy’s recent reliance on commodities and the Chinese economy, the growth outlook for Australia remains challenged, however most Australian companies have reported for the year and profits were largely in line with expectations. The Reserve Bank has cut interest rates to support economic growth in the non-mining parts of the economy, particularly housing construction, tourism and agriculture.
The low interest rate environment has seen the Australian dollar fall against the US dollar thus making our exports more competitive and cushioning the fall in commodity prices that are largely priced in US dollars. Finally the capital raising APRA has made the big banks undertake has sucked a lot of capital from the market and this along with recently volatility has contributed to the recent price declines.
- Energy prices: a substantial fall in benchmark oil prices has also added to volatility. In the medium-term, this is actually a positive for markets as oil is more of an input cost for most industries or businesses.
So what should you do?
If you already have trusted financial advice and a diversified investment strategy, essentially, ignore the noise and do nothing. Markets will ultimately settle as investment fundamentals return and investors become more rational.
If you don’t have a trusted adviser and are uncertain about how to protect and grow your wealth, volatile share markets do serve as a reminder of the importance of sound financial advice based on experience and your personal needs.
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General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977. Rev Invest Pty Ltd is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977.