Expect more rough seas in the financial markets from now until the end of the year as smaller crises, both political and economic, combine to drag prices down.
But most commentators agree that this is a correction and not a full scale retreat. Investors are giving shares a lot of support when they start to look cheap.
Australian shares are down 6.8% since September highs, dragging back last week from an 8.9% fall. Global markets are now down 7.4%.
The news has been poor: fears about lower global economic growth, a worsening Ebola outbreak in West Africa with cases appearing in Europe and the US, mixed economic news from the US, soft data from Europe and an escalating conflict in Syria pulling the world into another war.
One significant marker which has moved is the S&P 500 200-day moving average. The S&P 500 has closed lower than its 200 day average for the first time in almost two years.
Some view this as impending doom but the last two times the index was below the average, it has meant buying opportunities rather than heralding a market plunge.
David Poppenbeek, Head of Australian Equities at K2 Asset Management, says the markets have for sometime now been concerned with the impending end of quantitative easing in the US.
The Federal Reserve is set to end this economic stimulus program this month. The event brings with it an expectation that interest rate rise will rise in the US. Any indication that this might be delayed is seen as a positive in the market.
“In Australia this led to a weakening in the AUD and the subsequent unwinding of the yield carry trade from offshore investors,” he says.
“The selling of bank and resources stocks lead the Australian market lower.
“Now concerns centre around growth, slowing European economies and fears of deflation, weaker Asian economies and recent poor retail sales numbers from the US, coupled with tensions in the Ukraine, Middle East and the furthering Ebola outbreak.
“The US market in the view of many had been due a correction, and that is what we are now seeing.”
K2 believes this is a correction and not the beginning of a bear market.
“We continue to believe the yield from equities will underpin the asset class with the likelihood of interest rate rises being pushed further out into late next year,” he says.
Australian equities are looking more compelling by the day, he says.
This includes attainable EPS (Earnings Per Share) growth, better profits with more productive capital, under-geared balance sheets good cash flow and local dividends offer the highest yield in the world before franking.
“After a solid correction we could still see a rally into the end of the year. Australian equities look as relatively attractive as they have for sometime.
“There is always uncertainty and risk. The unwinding of QE and the ability of Government balance sheets to be further stretched to promote growth in the US and Europe can lead to concerns of what is next.
Scott Haslam, UBS chief economist, says the markets are nervous and skittish.
“From my perspective what we are seeing is something approaching a significant correction in markets,” he says.
“It’s not like the taper tantrum last year. I think it’s fundamentally a concern about growth and the growth we’re seeing now isn’t going to be strong enough to support the valuations we’ve seen in equity markets.
“I think the epicentre has really been Europe where growth clearly has lost momentum. Germany is where you have seen some weakness and it has been the engine or one of the key drivers of Europe. In the background you’ve got Greece trying to exist the Troika (austerity measures).”
In the meantime, he says, it’s not unusual to see a bit of international liquidation of Australian equity markets when the AUD starts falling.
Shane Oliver, chief economist at AMP Capital Markets, says there are signs that shares may be at or close to a low.
The month of October is known for seeing shares start to turn back up ahead of a rally into year-end, as this chart shows.
And Oliver says the fall in share markets has seen shares move well into cheap territory, with the forward PE on Australian shares at around 13.7 times being well below its long term average.
And lower bond yields also adding to the relative cheapness of shares.
“Our assessment remains that recent falls in shares represent a correction and not the start of a new bear market,” Oliver says.
The global growth outlook remains okay, of the “not too hot, but not too cold” variety.
And monetary conditions globally and in Australia look like they will remain very easy with Europe and Japan filling the quantitative easing gap which will be left by the US.
“The lower Australian dollar will also help boost growth in Australia and eventually profits,” he says
“So for these reasons the correction should be seen as providing a buying opportunity.
“October is often a month where market falls come to an end ahead of the Santa Claus rally into year end and I expect to see the same happen this year.”
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