Putting new year market falls in perspective: 4 things to consider
Shares have gotten off to a very bad start for the year.
It’s been a rough start to 2016, triggered by many of the same worries seen last year: a sharp fall in Chinese shares and the value of the Renminbi, which in turn triggered renewed worries about the Chinese economy; the weaker Renminbi triggering more commodity price weakness and fears of an emerging market crisis; some soft US manufacturing data; and geopolitical risks this time regarding Saudi Arabia/Iran tensions and North Korea.
Consequently all share markets have seen sharp declines (US shares -4.9%, Eurozone shares -5.6%, Japanese shares -6.6%, Chinese shares -11.7% and Australian shares -5.4%), commodity prices fell with the oil price falling to its lowest since 2009 and bonds rallied with safe-haven buying.
In this video, we discuss some of the driving factors behind the recent falls.
What does this mean for investors?
The poor start to the year clearly warns that the global growth concerns remain, that commodity prices are still under downwards pressure and that volatility in investment markets will likely remain high. However, it is worth noting that:
- The tensions between Sunni Saudi Arabia and Shia Iran – which have been building for some time – are unlikely to result in outright direct conflict in a way that dramatically pushes up oil prices;
- The latest fall in Chinese shares may have a bit further to go but look to have been exaggerated and driven more by fears and regulatory issues around the sharemarket and currency rather than a renewed deterioration in economic indicators;
- Despite a soft US ISM Manufacturing Index, most US data points to stable underlying growth of around 2%;
- Global monetary policy should remain easy this year with very gradual US Federal Reserve tightening as Japan and Europe progress with quantitative easing and China continues to cut interest rates. The continuing global weakness also adds to the case for the Reserve Bank of Australia (RBA) to cut interest rates again.
While it’s been an inauspicious start to the year for sharemarkets, our expectation remains for better returns than we saw in 2016, albeit with bouts of volatility like those seen in these past few days of the new year.
Outlook for markets
Worries about China and the US Federal Reserve are likely to drive continued volatility in the short term until some stability returns to the Renminbi and US dollar and hence in commodity prices.
Beyond the short term, we still see shares trending higher helped by a combination of relatively attractive valuations compared to bonds, continuing easy global monetary conditions and continuing moderate economic growth. Albiet, volatility is expected to remain high.
Very low bond yields point to a soft medium term return potential from sovereign bonds, but it’s hard to get too bearish in a world of fragile growth, spare capacity and low inflation.
Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield. National capital city residential property price gains are expected to slow to around 3% this year, as the heat comes out of the Sydney and Melbourne markets. Prices are likely to continue to fall in Perth and Darwin, but growth is likely to pick up in Brisbane.
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5% and the RBA expected to cut the cash rate to 1.75%.
The downtrend in the Australian dollar is likely to continue as the interest rate differential in favour of Australia narrows, commodity prices remain weak and the Australian dollar undertakes its usual undershoot of fair value. Expect a fall to around $US0.60.
About the author Head of Investment Strategy and Economics and Chief Economist at AMP Capital, Shane is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.