The volatility across global sharemarkets kicked up a gear in January, with a variety of issues concerning investors. Throughout the early part of January, the weaker Chinese manufacturing data and rout on Chinese stock markets dominated sentiment. In addition the collapse in commodity prices – particularly oil – gave investors a lot to digest.
Given the sharp slide on world sharemarkets, bargain hunters were active late in the month, and the better than expected earnings in some stocks supported the buying. On the final day of the month the Bank of Japan decided to lower the cash rate from +0.1 per cent to -0.1 per cent – providing much needed support to equity markets.
Clearly the commodity and oil sectors lie at the heart of the volatility. Why? The market is enduring one of its periodic bouts of paranoia about China’s ability to maintain growth and avoid a “hard landing”. We do remain wary on China – and on the resource sector as a result – yet we do not think that things are taking the negative turn that the recent market action would suggest. The oil market is oversupplied and will remain so while ever the Saudis refuse to curtail production.
Again, the only significant change here is the price of oil – the supply and demand fundamentals remain relatively constant. Near term the oil price will stay weak, either eventually triggering a supply side adjustment and in turn a rapid bounce back, or requiring demand to slowly claw away at the excess supply, which will lead to a more protracted period of low prices.
There have been some comparisons with the current volatility to the 2007/8 “GFC” and those forecasting further sharp falls in the Australian equity market. Crispin Murray, head of BT Equity Strategies, believes this is not valid for several reasons:
- Australian equities have not performed well over the past 12 months. Unless you believe a recession is imminent – and we don’t – then the market does not look expensive and it is hard to get too bearish.
- The global economy is in reasonable shape. There is some momentum in the US job and housing markets, unlike 2008 where the latter was entering a prolonged downturn.
- Weaker oil prices are leading to consumer disposable income rising; retail sales for the most part seem in decent shape.
- The global banking system is much stronger now than was the case eight years ago. Banks may take a hit to earnings from provisions against resource exposure, but greater capital strength means it should not present a threat to solvency.
Valuations for shares continue to remain supportive and we believe that it would take a major negative – such as a recession – to see the market move down significantly from here. That said, we remain in a low-growth environment and with concerns around China it is important to stay diversified and actively manage portfolios.
Knight Financial Advisors
The Australian equity market experienced a volatile start to 2016 and finished January down -5.5%. Global market weakness was the key driver with Australia following the results from offshore. Commodities markets once again resumed their loss leadership with Materials and Energy falling -9.1% and -6.5% respectively, as concerns around Chinese growth intensified. The result saw defensives favoured with outperformance only in Telecommunications (+0.7%) and Utilities (+0.7%) sectors.
Growth fears were confirmed via a decline in Australia 10-year bond yields from 2.9% to 2.6% and the Australian dollar falling to a low of AUDUSD 0.683 during the month. At its worst point in January, the index was down by ~10%.
Global share markets were dominated by threats of slower growth in China and a precipitous drop in oil which saw inventory write-downs of US$7.8T in the first two weeks of January. Volatility and caution remained the overarching themes this month; however, shares globally came off their lows towards the end of the month on hopes the Federal Reserve will slow the pace of future interest rate hikes. Characterised by a retreat from risky assets, the S&P500 Index finished down -2.3%, similar to the MSCI World ex Australia NR Index which lost -3.2%.
Key Asian markets were also down as news from China heightened fears the economy was slowing and attempts to prevent market wide panic failed. The Shanghai Shenzhen CSI Index (-21.0%), NIKKEI 225 Index (-8.0%) and Hong Kong Hang Seng (-10.2%) all lost significant ground. Consecutive substantial devaluations of the Yuan saw the Shanghai Composite close early, twice in one week, after hitting the daily -7% threshold. China factory activity shrank for the tenth straight month and a ban on share sales by major shareholders was put in place.
Listed Property & Infrastructure
The S&P/ASX 300 Property Accumulation Index retuned 1.0% in January, outperforming the S&P/ASX 300 Index, which returned -5.5%. Astro Japan Property Group saw the largest gains in the Index up 4.1% during the month; conversely Generation Healthcare REIT lost -7.7%. Domestic REITs have reported strong portfolio revaluations and cap rate compressions to December 2015, reflecting the fundamentals of the direct market over the past 12 months. This was apparent in Dexus Property Group, Investa Office Fund, Stockland, Vicinity Centres and BWP Trust.
In January, a sharp decline in risk appetite led to high levels of market volatility and weakness in risk assets. Global bond markets saw perceived safe havens rally. As such, high grade corporate bonds were stable and high yield bond indices sold off. The 10-year Treasury yield fell sharply from 2.27% to 1.92%, as the equivalent gilt yield fell 0.40% to 1.56%. The 10-year Bund yield dropped from 0.63% to 0.33%, shrugging off investor disappointment from December in light of renewed global growth concerns.
The final trading day of the month stunned the market when the Bank of Japan went against its prior view of being against negative interest rates by adopting a negative -0.1% interest rate for bank reserves. The Japanese government 10-year bond yield finished January at an all-time low of 0.11%.