Shares have got off to a very bad start for the year triggered by many of the same worries seen last year.
A sharp fall in Chinese shares and the value of the Renminbi, which in turn triggered renewed worries about the Chinese economy; the weaker Renminbi triggering more commodity price weakness and fears of an emerging market crisis; some soft US manufacturing data; and geopolitical risks, this time regarding Saudi Arabia/Iran tensions and North Korea.
Consequently all share markets have seen sharp declines, commodity prices are down further with the oil price falling to its lowest since 2009 and bonds have rallied with safe haven buying.
The poor start to the year clearly warns that global growth concerns remain, that commodity prices are still under downwards pressure and that volatility in investment markets will likely remain high.
So overall, while it’s been a very poor start to the year for equity markets and risks remain high in the short term, expectations remain for better returns this year than we saw in 2015 as share market valuations are reasonable, being cheap relative to bonds and bank deposits. Global monetary conditions are likely to remain very easy and this should in turn help ensure a rising trend in share markets, albeit with bouts of volatility along the way. While it’s hard to maintain confidence in Chinese shares, it’s worth noting that those listed in Hong Kong provide particularly attractive long term value trading on forward PEs close to 6 times, less than half that of Australian shares.
Outlook
Worries about the China and the US Federal Reserve are likely to drive continued volatility in the short term until some stability returns to the Renminbi and US$ and hence in commodity prices.
The key points are:
- 2016 should end much better than it has started off for investors, ultimately providing ok investment returns, but expect a continued volatile ride.
- Watch the Fed, the $US, global business conditions indicators, China and business confidence in Australia.
- The investment cycle still favours growth assets over cash and bonds – despite all the volatility.
Make sure your investment profile is still in line with your expectations, comfort level and ability to achieve your objectives. If you have any questions or you are not sure contact your Adviser to discuss your options.