Peter O’Callaghan shares his views on the current state of the markets.
Well, what an interesting time we live in. As many of you would know, and as the media continues to tell us, the share market is experiencing yet another trip on the “carnival rollercoaster”. Much of the fear is around the softening in the Chinese economy, and the falling oil price.
China is certainly slowing down which is not all that uncharacteristic of economies, as they get larger their growth rate slows (e.g. 10% growth in a $1 trillion economy is $100 billion while 10% growth in a $10 trillion economy is $1 trillion). Also the precipitous drop in the oil price has people worried over the safety of banks which have funded energy projects, many of which risk becoming unviable, leaving already fragile bank balance sheets with increased impairments (possibly insolvency). The result being the current carnage in bank share prices.
Much of what is happening also has its roots in geopolitics. OPEC would be worried about the rise of alternative energy technology and its impact on global oil demand or US energy self-sufficiency, while the oil price effect also impacts on heavily commodity dependent economies, most notably Brazil, many African countries, and Russia (not to mention Australia). So what might this all mean?
It is clear that the global economy is slowing and that this is impacting on asset prices. A sharemarket correction is well underway, and often provides buying opportunities for long term investors as those who are leveraged or ‘day trading’ seek to close out their positions or lock in profits etc. In times of market volatility there is often a ‘flight’ to perceived safe havens such as cash and government bonds. We are seeing an increase in ‘negative interest rates’ on offer, meaning countries are asking you to effectively ‘pay them to keep your money safe’.
Consider your alternatives. Money which is invested in the markets is subject to volatility however it is invariably invested in the businesses that make up the global share markets, the businesses you do business with every day. Cash, though considered a ‘safe haven’ investment, moves around the banking system or is deployed into the economy through lending for commercial or domestic investment.
While periods of market volatility are unnerving, it is also a normal part of the economic cycle. Those who invested with a long term horizon will experience ups and downs however our focus remains on helping clients achieve their personal objectives. We are regularly reviewing our portfolios and continue to do so however we remain committed to our current strategy. If you have any concerns in relation to your personal planning please contact me.
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