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 Charter adviser should you wish to discuss recent market events or any aspect
of your investment strategy.
This newsletter is provided by Charter Financial Planning Limited (ABN 35 002 976 294 & AFSL No. 234665) an AMP Group Company.
It is of a general nature only and any advice is not based on your objectives, financial situation or needs. Accordingly you should consider the appropriateness of any advice to your personal circumstances before acting on the advice. Before you make any investment decision, you should read the current Product Disclosure Statement available from Charter or your financial adviser. Although this information was obtained from sources considered to be reliable, we do not guarantee it is accurate or complete. The information in this publication is current as at 25 August 2015, and may change over time. Charter is part of the AMP group of companies. No additional remuneration or other benefits are paid to us or our related companies or associates in relation to the advice provided on this page. If you decide to purchase or vary a financial product, your financial adviser, Charter and other companies within the AMP Group or associates of Charter will receive fees and other benefits, including fees calculated as a percentage of either the premium you pay or the value of your investment. Further details are available from your adviser or Charter. Past performance is not a reliable indicator of future performance.