ARE WE SEEING A SHARE MARKET CORRECTION?

By Paul Nicol

Global risk aversion has engulfed markets over the last month. Since the high point of our share market on September 2, the S&P/ASX All Ordinaries TR Index has fallen -8.33%. Global share markets have produced similar losses with no major market spared.

A correction is considered to be a fall of 10% or more, so we are not there yet, but the current fall has been swift and sharp.

S&P/ASX All Ordinaries TR – since 1 July 2014

Incredibly, over the last 34 years in the Australian share market, there has been a correction of -10% or more on 33 occasions. These type of corrections, using history as a guide, are almost inevitable every year. In fact, we have been saying to clients more regularly that after 8 consecutive quarters of positive performance from the Australian Share market, a pending correction was very likely.

Returns from the bottom of the share market post the Global Financial Crisis have been exceptionally strong. From near the bottom of the market on 1 January 2009 the S&P/ASX All Ordinaries TR Index has increased 82.1%. It is interesting over this period (nearly 6 years) that we have seen 3 corrections of -10% or more with a possibility this current bout of volatility may be the fourth. Again, this is very much in keeping with historical trends.

S&P/ASX All Ordinaries TR – since 1 January 2009

What is causing the current fall in share markets?

There is no one dominating factor in the current bout of volatility, rather a series of events or data which perhaps point to a period of global growth weakening. These factors include:

• IMF downgrades 2015 GDP from 4% to 3.8%
• German exports down 5.8% month on month – significant as Germany is the 4th largest economy in the world
• IMF saying there is a 40% chance of a further European recession
• Expectations of lower GDP in China
• Concerns around the shadow banking system in China
• Global geo-political concerns including the Ukraine & Russia, Israel and the Gaza, Syria/Iraq & ISIS and the Hong Kong protests
• Global medical threat of Ebola
• The potential for US interest rates to increase

Interestingly enough, even after the recent decline, the Australian share market is up 0.41% calendar year to date.

Given all these mounting risks, it is likely the share market will remain volatile and hyper sensitive to economic and geo-political concerns. We are keeping a close eye on these events, but as we speak we feel the global world economy is significantly better positioned than at any point since the GFC and expect normality to return to markets in the near term.