Anyone invested in shares knows that the last five years has been a very difficult time. Then, just as the market is once again looking positive, 10% is wiped off the value of Australian shares in very quick time.
Basically there have been three catalysts for the recent falls:
The first is a speech by the Chairman of the US Federal Reserve, Ben Bernanke, which indicated that the Central Bank ‘may’ reduce its quantitative easing program in the near future ‘if’ the economy continues to gain momentum.
In simplicity this means the Federal Reserve is going to slow down its purchases of bonds which will increase the yields on these assets. Whilst the potential end of quantitative easing is not a surprise as the US economy awakens, the short term market reaction was unexpected.
Whilst there is more at play than just this, typically investors will sell shares in favour of bonds if their yields are increasing. Therefore, if the Fed stops suppressing US bond yields (by slowing their purchasing of bonds) then naturally money will shift from equities to bonds.
However, the base from which bond yields are rising is very low, and we expect that it is more likely that bond yields will consolidate from here and that the focus on yield will remain.
The second catalyst has been that interbank lending rates have recently soared to record levels in China which, at least in the short term amounts to a credit squeeze. (Interbank lending rates are simply the interest rates that banks charge on lending to other banks).
The ‘squeeze’ being that if interest rates are too high then the banks won’t borrow, which in turn means they can’t lend, with the end result being that growth in the economy is stymied. However, whilst the situation has eased somewhat, rates are still relatively high (the overnight lending rate between banks had dropped to 8.49 percent, down from a record-high fixing of 13.44 percent last week, but still much higher than last month’s levels of less than 4 percent).
Chinese growth is slowing and projections are now for growth at close to 7% as credit growth also slows. The situation is likely to remain volatile, and unfortunately, there is also evidence of increased bad and doubtful debts from some Chinese banks.
The third driver of the recent falls has been international investors selling Australian equitiesand taking their money home. This has put real selling pressure on not only our stock market but also the Australian Dollar.
And no doubt with the dollar falling quickly this selling pressure on our market has stepped up as international investors lose value when the AUD falls.
Global Growth – Bridges Research Outlook
The base case for some time has been for sub-par global growth and our view has not changed. In Bernanke’s testimony last week one of the reasons cited for a reduction in quantitative easing was that growth prospects appear sound for the US economy. We do not entirely agree with this view in the medium term, however, either way it was inevitable that the Fed’s programme would have to be slowed and eventually withdrawn.
The rebound in consumer confidence and housing has been largely driven by quantitative easing, thus we remain unconvinced that consumer spending in the US will be strong over the medium to long term.
The medium term outlook for corporate earnings is weak, and we continue to believe earnings will disappoint in the US relative to current expectations. Equally revenue growth is likely to remain pedestrian given the weak demand outlook.
This Guest Blog was provided by Brett Martin from Bridges Financial Advice.
Message from Mel: In this article Brett really tells it like it is! We continue to recommend that where possible small business owners should take some of their chips off the table and invest for their personal future. However the market climate is tricky as Brett has explained, so we also recommend that you seek help from a qualified financial adviser before you invest your hard earned cash.
Image compliments of nongpimmy and freedigitalphotos.net.