Share market volatility is expected
Investment market update
For anyone paying attention to investment markets, there is no avoiding the fact that there has been a recent fall back and rally in share prices around the world. This saw the value of well-known companies drop significantly at the end of 2018 and since recover most of the lost ground. When looked at in isolation, the fall is staggering and, for investors looking for short term returns, disheartening.
The below table shows the value of the Australian share index (S&P/ASX 200) over the past six months. It demonstrates that those investors able to retain their composure and stay investors quickly recovered their losses.
With any form of investing, it is important to remember your specific goal behind the desire to invest. As such, a sudden fall in the share market may not be as alarming as first thought. Most investors should consider the timeframe behind their investment strategy and, given current market conditions, consider whether you need to readjust your plans.
History has proven that share markets suffer periods of negative returns (or market corrections). This is part of the journey for those that understand the long-term payoff. Most Australians hold a significant portion of their retirement savings in both local and global equities and are understandably nervous when there are periods of volatility. It is, therefore, fitting to remember your strategy for wealth creation and preservation, as it is likely the shares held in your super and pension account are designed to provide long term growth and to protect from the impact of inflation. As such, a suitably long-term timeframe should be considered when looking at your share holdings. It is the role of other asset classes, such as cash, to provide for your short-term needs.
By focusing on the long-term, we can see recent falls in an appropriate context. The below table shows the same index since the start of 2009, when share markets were struggling from the impact of the Global Financial Crisis:
Although falls in markets are not pleasant for those invested, this graph shows falls occur regularly and do not offset the long-term benefits of share investing.
What is causing the fall in markets?
Outlining the cause of recent falls can be difficult, however, it is important to remember that our investments can be heavily impacted on what is occurring around the world. The US market, for instance, represents over 50% of the world’s share market value. With that in mind, some of the broader trends that have caused concern for investors are:
1. Trade Wars
Since coming into office, President Trump has attacked current trade arrangements and then restructured them in an attempt to bring trade deficits under control and to protect US industry. Discussions with China, however, are dragging on. Underpinning the trade talks, are factors like the transfer of technologies to Chinese industry and the widespread rise of China as a global superpower.
China, with its grand plan for economic expansion, is unlikely to submit to external pressures, with some expecting them to simply endure the short-term pain and wait out President Trump’s term in office. So, with tariffs over key industries flying back and forth, investors are fearful of the repercussions on growth for the two largest global economies.
Share markets love a stable and consistent environment for businesses to operate in. The current level of uncertainty around trade for the UK has unsettled some investors, worried about the impact that changes to trade deals may have on the underlying profit of businesses and economic growth with the UK generally.
3. US interest rate increases
Ever since the Global Financial Crisis, interest rates have been cut around the world, however, this cannot continue long term. In the US, the Federal Reserve has increased rates to counteract the natural rise of inflation brought on by lower unemployment. This, however, is a drag on the economy and investment markets. Although President Trump has been keen to call for these increases to stop, it is expected that they will continue.
It is also important to remember that US government debt levels are at record highs, with over $1 trillion of that debt held by their new trading rival, China.
4. Local housing market falls
Closer to home, we have experienced an impressive run up of property values over the past two decades. As debt levels rise and affordability tightens, many fear that the recent drop in the value of property sales is the start of a much larger collapse. A falling housing market is a bad sign, not only for property investors but Australian business in general. The flow on effect to the broader economy is causing concern for some investors, as lower housing prices tend to have a flow of effect for things such as consumer spending.
Why stay invested?
There are always fears for markets to overcome and, unfortunately, those that sit on the sidelines waiting for the ideal opportunity often miss out. Businesses around the world continue to produce good profits and are supported by historically low borrowing costs. Economic growth for the developing world is not only creating new investment opportunities, but is also growing the available customer base for existing global businesses. Whatever the next 12 month holds, share markets and well-run businesses will survive.
Remember success in investing is about time in the market, not timing the market. Make sure to consider this as part of your investment strategy and, if you need advice specific to your situation, then book a free preliminary consultation with us.
If you’d like to grow your wealth, then get in touch for a free preliminary consultation. Click here to register.
(Graph reference: www.asx.com.au)