This year’s investment markets have been characterised by a high level of volatility resulting in large falls and large gains in the ASX200 (top 200 Australian companies by market capitalisation). The word itself, stemming from the Latin ‘volatilis’ (to fly), has been variously defined as ‘changeable’, ‘mercurial’, ‘flighty’ and ‘tending to fluctuate sharply and regularly’.
The wild fluctuations that have characterised the Australian share market so far this year, have their sources in both real and perceived causes. On the very real side is the decline in value of the resources sector, especially iron ore, oil and coal. The export of iron ore has traditionally been Australia’s largest export commodity. Australia has been a major world supplier of these resources and the decline in price, as well as in demand, has a direct correlation on the market value of the companies that produce these minerals. This decline has had an obvious flow on to the Australian economy resulting in a significant decrease in tax revenue for the government, loss of jobs in the relevant industries and a loss of flow-on benefits to other sectors of the economy. The glut of petrol, which is a result of world overproduction, has also contributed to market uncertainty and increased share market volatility.
Another very real cause of flighty markets has been the world geo political situation with wars in Iraq, Syria and Afghanistan and the associated terrorist offshoots causing concern on the financial markets. Political instability in the EU with Britain’s possible withdrawal and the humanitarian crisis resulting from the displacement of millions of refugees from the Middle East are also major contributors to the instability currently being felt on world markets.
And the wild card – China – is Australia’s major trading partner. The Shanghai market has been characterised by high swings sometimes up to 5% or 6% per day. These volatile movements cause large ripples in the developed world markets as the Chinese economy moves away from manufacturing and construction to a retail centric economy. It is likely that the substantial GDP increases in the past will not be repeated with the Chinese economy expected to grow at a more moderate 5% to 6%. So while the reduced consumption of raw materials such as iron ore, coal and oil will have immediate negative effect on Australian resource companies, other opportunities in areas such as education, tourism and agriculture will present themselves. Some Australian companies have already made the adjustment in the light of a growing Chinese consumer class hungry for Australian products.
And the perceived causes of volatility can be a herd mentality over reaction to any of the above real causes or any new cause. Market sentiment can be irrational with ‘follow the leader’ buying and selling causing waves adding or washing away company value.
So what does the crystal ball say? Probably continued volatility in the short or possibly mid term. This will mean that some of the growth assets in super portfolios will vary according ‘volatilis’ in the market. In a bear market (declining market) fear can take over and it’s important to take a reasoned or balanced point of view. Financial planners note that there is a natural tendency to move to defensive assets such as cash and bonds during high periods of market decline and this is understandable, but they also note that it is important to avoid gut reactions when making major decisions about your finance and it is an appropriate time to obtain professional financial planning advice. Selling low can be a recipe for crystallising loss. NGS Super has a team of professional financial planners who are able to assist members considering switching their asset allocations and they can be contacted on: 1300 133 177.
This year will certainly prove interesting from an investment point of view and the challenge for all investors will be to navigate the seas of volatility with a steady hand.