Market Update November 2018

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Market Update- By Sarah (Rogers) Stow

I have had a few clients asking me lately if they should be worried about what is happening in the share market and whether they should be doing anything about it.

I thought it would be a good time now to send a market update out to everyone.

 

What’s happening with the share market

October was a hard month for shares with Global share prices dropping 6.8% and Australian shares dropping 6.1% which was the biggest loss we’ve had since August 2015 for Australian shares and August 2011 for Global shares. We have been on an upwards run with shares for a fair while now returning great returns year after year since the Global Financial Crisis (GFC) so a correction in the market was expected. On a good note, that’s all we expect this drop to be, a correction. We need corrections in the market to help balance the market out again to stop events like the GFC happening where the market is too good for too long, and then has a big drop to correct. In fact, in the last week since the drop we have already seen the market jump back around 3%. Fundamentally, the economy is still strong and there aren’t any key factors signalling a crash, just a few minor issues affecting the market.

 

The property market

Though this update is more focused on what is happening in the share market, we have all been hearing about the downturn of the property market, in particular Melbourne and Sydney. But even if you aren’t in the capital cities, this still affects you because we see the flow on effect into our region.

We have seen the property market slow in the last year with changes to depreciation and APRA regulations (the government) stepping in to control what the banks are allowed to lend.

For our Albury/Wodonga clients we didn’t see the great rise in prices that were seen in the capital cities as the governments controlling stopped the growth before it got to us, therefore we are also unlikely to see the great drops of the capital cities.

However, we are expecting there to be further drops in house prices over the next two years due to tightening credit, lower foreign investment, and rising unit/apartment supply. Even more so if Labour is elected next year and the prospect of reduced negative gearing and capital gains tax concessions comes in to play. We continue to see Sydney and Melbourne prices falling 20% from the top of the market to now, and national capital city average prices falling around 10%.

 

Our outlook for markets

It is a bit too early to say now whether the share market drop is over or if we will see a little more volatility for the short term. But long term we think the economy is looking pretty good. Shares remain at risk of further short-term drops, but we continue to see the trend in shares remaining up as global growth remains solid.

National capital city residential property prices are expected to slow further with Sydney and Melbourne property prices likely to fall another 15% or so, but Perth and Darwin property prices are at or close to bottoming, and Hobart, Adelaide, Canberra and Brisbane seeing moderate gains, so the market is recovering there and that is a good sign. Remembering though, even with Melbourne and Sydney house prices dropping, they were at an extremely high point in the market, so like with the share market this is a correction that was needed.

We expect Australian Economic growth to fall back to around 2.5-3%, meaning inflation will remain low.

What this means to interest rates for home loans is that we don’t expect the Reserve Bank of Australia to increase the interest rate until late 2020 at the earliest. If anything, we could see another rate cut before then, but that wouldn’t be until late in 2019. Keep in mind though, the banks may still take it upon themselves to increase your interest rates, so prepare for the worst and pay down debt.

On the flip side to low interest rates for loans, it also means that cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.

 

Is there anything you need to do?

When we invest in the share market we know the returns will go up and down and on average we expect a 9% return if you are 100% invested in shares, however, some years will be higher, and some will be lower. Looking a little like the graph below which should be familiar with our clients. It wouldn’t be investing if we could guarantee a 9% return year on year. If you are looking for that sort of guarantee it might be better looking at term deposits, but they are only going to return you 2.2%pa. You earn more for the risk that goes along with investing.

When we choose your investments and how much to put into shares we do it with your timeframe for investing in mind. Therefore, if you needed the money next year, we wouldn’t put the money 100% in shares, we’d choose more conservative investments for you. The idea is we know drops in the market will happen, but we invest your money knowing you can ride out any drop and end up better off by the time your money is needed, giving you the average of around 9% returns.

Our clients will also recall us talking about core/satellite portfolios which is the way we choose your investments.

We put roughly half of your money into index managed funds, this is what you are currently seeing the share price drop on, these are low cost managed funds and form a good foundation for your investments. This is the investment where if you are listening to the news and the markets gone up you’ve made money, and if the markets gone down you’ve lost money. They are invested across the index with Australian and Global shares.

In down markets like we have now this is where our satellite funds come into play, these are the funds we choose that don’t correlate with the index. They are actively managed, so the returns aren’t reflected by what the news is saying. The point of these funds is to stop you losing money in downward markets by getting returns from other areas. Right now, these are the funds that are working extra hard to stop your portfolio from dropping too far with the market.

 

So, to answer your question on whether you need to do anything or change your investments, we believe the answer is no. We invest expecting these sort of market conditions and choose your investments based on that. The only time you lose money with the share market is when you sell in a downward market. Trust the process and the investment discussion we had when we put your investments in place and know that everything is doing exactly what we expect it to be doing. You don’t need to do anything. If anything, now is a perfect time to be putting money into investments as the share price is lower and you are buying shares cheaper, meaning when the market recovers you will make more money faster.

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