SHANE OLIVER: It's too early to say whether stocks have bottomed

A dog salesman drives through the city streets of Chengdu, China. John Moore/Getty Images

The last few days have been chaotic on global markets.

Fears about China’s economy and steep falls in its markets sent equities into free fall across the world.

Today the volatility appears to have settled with the ASX 200 up about 1.3%, Shanghai 1.55% higher, Hong Kong 2.2%, and Japan 0.71%.

Shane Oliver, chief economist at AMP Capital, says the last few days are likely to be a severe correction rather than a new bear market – but there may be more falls to come.

“It’s too early to say if shares have bottomed but valuations have improved, investor sentiment has quickly become very negative (which is good from a contrarian perspective) and China’s easing move should help if it’s followed up with more easing,” he says in a note to clients today.

Oliver says shares often go through rough patches and market falls throw up opportunities. Dividends also get more attractive when compared with a lower share price.

However, it’s impossible to know whether the market is near or at the bottom.

“Our view remains that further falls and volatility in next few months could occur as worries regarding China and emerging markets linger, concerns about whether the Fed will raise interest rates soon will remain and seasonal weakness continues into September/October. However, there are some positive signs,” says Oliver.

He says the falls have made share valuations quite attractive. “Our valuation measures for global and Australian shares have fallen back into very cheap territory,” he says.

This chart shows the difference between dividend yields and returns from bank deposits.

Shares are now giving superior returns.

The gap between the the dividend yield on Australian shares, about 6.5%, and term deposit rates, about 2.5%, is now at its highest since the GFC.

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