News regarding market volatility and the position of the world governments has flooded the media over the last week. Thursday night saw the most significant decline in global equity markets since February 2009. We wanted to provide clarity surrounding what this means to the markets in the short and long term.

Keeping market movements in perspective:

Despite last Thursday night’s extreme movements, there was nothing in terms of a fundamental change in the world economy in the past week, that hadn’t already been taken into account. We continue to be in a volatile market environment, in a slow global recovery.

 It is helpful to put last weeks’ moves against the backdrop of the following key fundamentals:

  1. The recent softer US data is consistent with our long held view that economic data overseas will oscillate between good and bad for a while yet, but that the net effect is the continuation of a slow recovery over the next year or more.
  2. Core countries such as Germany continue to deliver strong growth, and continue to have one of the best performing share markets in the world over the past year – despite the European sovereign debt issues.
  3. Equity valuations remain positive (on the cheap side of longer term averages). US earnings in particular remain robust with 75-80% of reporting companies in the current earnings season beating expectations – 43% of these by more than 5% (although US earnings growth is expected to slow to a more sustainable pace going forward).
  4. US government bond valuations are now considered to be at extremely expensive levels. The debt ceiling/deficit cutting issues will be worked through and US default is an extremely low probability going forward.
  5. The central scenario for Europe is that sovereign debt worries will continue to muddle through for now, with Italy arising as the next concern. Italy’s bond market is the 4th biggest in the world and any agreement on a long term solution still a way off yet.
  6. Emerging economies remain the key drivers of global growth. Central scenario is for a soft rather than hard landing in China (slowing to 8% pa or so – still impressive)

 Key Message

  •  Since Friday world governments have been collaborating to help find a solution for the above issues
  • Whenever there are large market-driven movements like last Thursday night, it is likely there will be continued volatility until things settle down again.
  • The key is not to panic. We remain confident that while market conditions will continue to be volatile over the rest of the year, now is not the time to make knee-jerk reactions and run to cash (as many did in the depths of the GFC – with terrible results in the ensuing recovery).
  • We encourage you to keep looking towards your goals and the strategy put in place. This will have to look through the current media noise to keep headlines in perspective (especially against the backdrop of market valuations and economic fundamentals). There is nothing in the past week or so that should change your medium to long term investment strategy.
  • The Australian market is trading 29% below its historical average and around 10.3 – 10.5 of future earnings

As you can see from the above there are a lot of positives when you factor in the strength of corporate and consumer balance sheets. Regardless though, we will continue to monitor conditions to ensure you’re kept informed. Our investment committee has a strong focus on risk management ensuring that our portfolios aim to minimize downside risk and therefore helping to protect your capital in falling markets

Please feel free to contact us if you’d like extra information or have any questions relating to any of the above items.