September was another poor month for the share market.
The All Ordinaries Index fell 6.9% to close the month at 4,070.10 points. The Australian share market has now fallen over 16% for the 2011 calendar year.
Global share markets were all significant weaker with the Dow Jones Index falling 6.0%, the FTSE falling 4.9%, the Nikkei 225 falling 2.8% and the Hang Seng falling 14.3%.
There are three key themes that have triggered such extreme market movements over recent months:
- Fear of slowing growth turning into a recession in the US and Europe;
- The apparent inability of US and European governments and central banks to respond effectively either due to normal prudential barriers (budget deficits, sovereign debt limits, inflation concerns) or artificial barriers (political divisions within countries and between countries, internal divisions within the European Central Bank and the US Federal Reserve); and
- The ongoing spectre of Greek default and risk of contagion engulfing the southern states of the Eurozone, which would ultimately lead to a European banking crisis.
These themes are all inter-related and not mutually exclusive. In addition, Asia is also highly likely to be affected due to strong trade and capital links with Europe and the US.
What does this mean for investors?
The sharp fall in share prices means that the market has ‘priced-in’ a significant financial crisis in Europe (including a Greece debt default), recession in Europe and recession in the US.
The above scenario is different to International Monetary Fund growth forecasts. The IMF has recently downgraded its growth forecasts for both Europe and the US, although it is not predicting a recession.
It must be said that a recession in Europe is a high possibility based on recent events. However, in my view, it is more reasonable to expect a slowing of growth in the US rather than a recession.
If the US can avoid recession there is a good chance of equity markets recovering in a similar fashion to that experienced in the second half of 2009. However, it is important to note that governments around the world now have fewer resources to stimulate their economies (with the exception of Australia) than what was available in 2007/08. In addition, volatility in the share market will remain a feature for a considerable period of time.
Australian shares (in particular) still have a place in a long-term investor’s portfolio. Australian companies have done a good job in reducing debt levels and offer attractive income returns (refer Investment Perspective – Shares or Cash?)
Australia has an enviable position relative to other developed nations with the flexibility to stimulate the economy by cutting interest rates. In this regard, the RBA meets this afternoon to assess interest rates. Most economists expect rates to remain on hold today, however expectations are that the next rate move will be a cut.
The Australian dollar fell sharply during the month on the back of increasing global economic concerns. The Australian dollar is currently buying US95.12 cents.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.