The Share Market Roller Coaster

The share market roller coaster has continued, so I wanted to provide an update to help keep you informed and put all of what is happening in perspective. Here are the key points as I see them now;

What has happened?

The last four months of 2018 saw sudden and dramatic falls in share markets around the world. The US and Australian markets fell by approximately 20% and 14% respectively. Daily moves and intra-day moves reached very high levels, sometimes 3% in one day, or even in a few hours!

January has seen a nice recovery which has reduced those losses by over half. The key factors are;

Interest rates

As I have said before, this is boring, but it is crucial. One of the main reasons for the share market falls in late 2018, was the fear that interest rates were being increased too fast by the US Federal Reserve (Fed) and this would damage the economy and lead to a recession. Since then the head of the Fed, Jerome Powell has made comments about rate move decisions being based more on the data as it changes, and that inflation was under control. He was also talking about two rate increases this year rather than four. This has settled the markets on this issue and is one reason for the recovery in recent weeks.

Trade War/Trump

Usually Politics doesn’t have such a big impact on the markets. Brexit is a good example. Whilst it is a significant event, any market impact has either been short term and/or localised. However, we’ve never had anyone like Trump before. So, politics is having an impact. His unpredictability creates uncertainty and that is one thing that key market investors don’t like and causes them to sell and sit on the sidelines until a clearer picture emerges.

The Trade War has already had a negative impact, more so in China, but also in the US. The evidence around this and the fears about interest rates both escalated in that same period at the end of last year. Since then, we have seen the US & China agree to meet, then follow up and actually meet and both make positive comments about the meeting. The reality is that not much happened in terms of a solution, but positive statements by both parties have helped soothe the markets. It’s not over but at least the leaders seem to recognise that a solution is needed to limit the economic damage. 

China

The rate of economic growth in China is slowing which has an effect on the rest of the world and particularly Australia. 

Part of this is a natural reduction as it is not possible to continue to grow at the high levels of the past. Part is due to the structural change, moving from reliance on exports and investment to consumption, excessive debt and now the Trade war which has had a negative impact.

The amount of debt is particularly concerning and has been growing to an alarming level. Bad debts have been increasing as well. Steps are being taken to reduce the problem but just as the increase in debt helped the economy grow, reducing the debt will slow economic growth. Rather than have a dramatic and somewhat ‘cleansing’ event like the US did with the collapse of Lehman Bros. in 2008 and the GFC, the Chinese appear to be trying to gradually manage the issues. 

It’s difficult to see a solution that will remove the concerns that exist about China.

Conclusion and what does it mean for investments?

There will be losses on the portion of portfolios that are invested in share markets. Also, the figures for the year ended 31st December will be disappointing. However, the recovery so far in January will see over half of the losses recouped. 

The last few weeks have been a nice respite from the awful period prior to Christmas. However, we shouldn’t expect that the problems are all behind us and we will again see steady, positive investment returns, such as in the years leading up to mid 2018. Remember that period was unusual. Volatility is normal, although not quite to the level we have endured recently. 

The recent period has provided an opportunity to examine the managers we use under extreme pressure of market falls. At our Investment Committee meeting last week we decided to exit two of our holdings. We waited until they had recovered strongly in January before selling down. We placed the proceeds with one of our defensive managers. Our analysis will continue as we strive to best manage risk and returns.

As always feel free to contact your Financial Planner or me if you would like to discuss this further.

Gary Lucas