2016 started with a wild first month on both local and global markets. The Australian Stock Exchange index (ASX200) experienced its worst opening week on record, falling 5.3%. The remainder of January has been highly volatile with our market reaching as low as 4,850 points before rebounding slightly in the past week to find it's way back above 5,000 points.
The recent falls have been attributed to economic developments in China and the resultant falls in international markets, in particular Chinese equities. After single day declines exceeding 7%, the Shanghai and Shenzhen stock exchanges were forced into trading halts on two separate occasions in the space of a week.
The declines are primarily owing to fears of a China-led slowdown in global growth. As the biggest manufacturer in the world, Chinese growth data is often considered to be a barometer as to the state of things globally. One of the challenges is that the information that comes from China is rarely reported with the same transparency that we see from other nations and there have long been concerns that this data is at best ‘manipulated’ before being released. This creates a major problem: people’s unwillingness to trust the reported information makes the Chinese market far more sentiment-driven (rather than on fundamental information like earnings, yearly performance figures etc). A falling value of China's currency, the yuan also provides further confirmation that the world's second largest economy is continuing to slow.
The recent weak data from China sent ripples around the globe and particularly through the commodities market - raw materials such as iron ore, silver and oil. China requires huge amounts of these commodities each year and there are fears that their reduced growth will mean less production, in turn requiring less raw materials. The anticipated lower demand drove commodity prices sharply downward, perhaps none more than crude oil which recently hit twelve year lows.
Taking a global view, the magnitude of the recent share market falls surprised many given that economic data in other major economies has largely been good or very good. In the United States, the pace of job growth remains very strong (+292,000 jobs in Dec) and the unemployment rate remains low.
Across the Atlantic, European business sentiment indicators and the labour market are showing good improvements. Emerging markets (countries such as Brazil, Russia and India) have largely continued their good news story with ‘emerging markets excluding China’ outperforming developed markets over the last three years.
Here in Australia, the early signs for 2016 suggest moderate economic expansion of 2.5% for the year. Australian retail sales are growing at a healthy five per cent annual pace, unemployment remains low at 5.8% however business expectations for the economy are historically weak yet this has been the case for some time. The Australian economy may also be aided by further interest rate cuts (currently 2.0%) during 2016 with the majority of economists forecasting a 25 basis point cut in the early months of 2016.
At Verse, we'll be keeping a close eye on markets and economic developments as they unfold. If you're wishing to learn more about how these global issues are likely to impact your superannuation or investments, we encourage that you contact us to discuss this further.