New Year and Stock Prices drop- What’s happening?

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Wow, what a turbulent start to 2016 we’ve had for the share market world wide.

A combination of unexpected events in China, the Middle East and North Korea prompted sharp sell-offs in share markets.

Our thoughts in short; While markets continue to experience volatility in the short term, the longer term view for economic growth remains positive.

While the Chinese sharemarket and currency stabilised a bit on Friday and US jobs data was positive, investor nervousness remained, pushing Eurozone shares down another 1.7% and the US S&P 500 down another 1.1%. As a result of the poor global lead, the Australian Stock Exchange (ASX) 200 futures fell 80 points, signalling a weak start to trade for the Australian sharemarket today.

With the ASX200 dropping below 5000 today and closing on 4,932.20 today this is the lowest we’ve seen the market for a very long time.

The poor start to the year clearly warns that global growth concerns remain, that share prices are still under downwards pressure and that volatility in investment markets will likely remain high.

We expect market volatility to continue, however our expectation remains for better returns this year than we saw in 2015.

Remember- As we’ve spoken to our clients about, shares often go through rough patches; selling after falls just turns a paper loss into a real loss; market falls throw up opportunities; and dividends remain more attractive and more stable than bank interest. This is not a time to change your investment strategy, we are in for the ride and wait until we come up on top.


Our outlook for the markets

  • Worries about China and the US Federal Reserve are likely to drive continued volatility in the short term until some stability returns to the RMB and US dollar, and hence in commodity prices.
  • Beyond the short term, we still see shares trending higher helped by a combination of relatively attractive valuations compared to bonds, continuing easy global monetary conditions and continuing moderate economic growth. However, volatility is expected to remain high.
  • Very low bond yields point to a soft medium-term return potential from sovereign bonds, but it’s hard to get too bearish in a world of fragile growth, spare capacity and low inflation.
  • Commercial property and infrastructure are likely to continue benefiting from the ongoing search by investors for yield. National capital city residential property price gains are expected to slow to around 3% this year, as the heat comes out of the Sydney and Melbourne markets. Prices are likely to continue to fall in Perth and Darwin, but growth is likely to pick up in Brisbane.
  • Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5% and the RBA expected to cut the cash rate to 1.75%.

The downtrend in the Australian dollar is likely to continue due to interest rates, share prices remain weak and the Australian dollar undertakes its usual undershoot of fair value. Expect a fall to around US $0.60 by year-end.

So what to do?

Stick to your investment strategy, speak to your adviser if you are nervous and want to learn more about what is happening in the market.

But have you got spare cash lying around? While the markets down its a perfect time to buy. Shares are currently rather cheap, especially relative to bonds and bank deposits – and global monetary conditions are likely to remain very easy, which should help ensure a rising trend in share markets.


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