As you would be aware, following a number of years of strong growth all major share markets have been heavily sold down over the past week. World markets have been extremely volatile, however in recent days many markets have started to recover some of the losses.  

 What has caused the most recent losses?

There appears to have been little change in underlying market fundamentals, but the main drivers causing the weakness seem to be:

• Increasing concern over the outlook for economic growth in China
• Recent large falls in the Chinese share market
• Ongoing weakness in commodity prices including iron ore, copper and oil
• Concern about the possible first rise in interest rates by the US Federal Reserve
• The resignation of the Greek Prime Minister and the ongoing refinancing of the Greece bailout
• The impact of computer-based high frequency trading which aims to take advantage of volatile markets.

While the impact of other factors cannot be ignored we believe that the major cause for concern is the state of China's economy, in particular the slowing of economic growth.  

The Chinese government has a number of tools available to help stabilise the economy and shore up economic growth, including cutting interest rates and bank reserve requirements.  Policy makers are walking a tightrope to introduce market reforms as they move the economy toward services and consumption, while trying to keep up growth previously fuelled by credit and investment.  We expect that the government will take the necessary steps to help stabilise the share market and economy, however this is an ever changing situation which we will keep under close review.  

Is this just a correction or something worse?

While the timing and magnitude of the falls experienced were not expected, sharp declines in share markets are not unusual and do not necessarily mean there will be an extended period of weakness.

Previous market falls that have resulted in extended downturns have occurred in times of financial systems dysfunction, excessive valuations or imminent economic recession.  None of these factors appear to be in place today.  

China's slowdown poses challenges to global growth, and while it is unlikely to trigger a global recession, it can never be completely discounted.  The US economy looks solid and data from European economies continue to point to improving growth.  Lower oil prices have pushed down inflationary expectations and provide an economic stimulus around the world.   US employment growth has been quite strong, and the expected rise in interest rates may now be held off until the new year.

What should I do?

We understand that large falls in the market can be concerning. However at times like this it is important to focus on your long-term objectives and avoid the temptation to act on short-term events.

In fact many investors take advantage of periods like this to calmly look for opportunities to buy good quality stocks for the long-term at very attractive prices. 

We expect the markets will remain volatile for some time yet, and therefore recommend that you continue with your current long-term strategy, and do not sell assets and crystalise losses that would otherwise be recovered in the medium to long term.

 
We will continue to monitor the market, and will keep you informed as the situation evolves. In the meantime should you have any queries please feel free to contact our Blackburn or Essendon offices.