It’s been another
week of nervous markets and even more nervous investors. The week saw the
Chinese stock market collapse by more then 17% in three days. It’s a true
indication that the Chinese Economy is dealing with fundamental flaws. Though
the general stock market plunge should not affect Australian stocks directly,
we are more susceptible to the slumping Chinese economy.
On top of the issue
of a sluggish China, you have a stock market buoyed by borrowed money to invest
and inflate the stock market bubble. All very Storm Financial style and
we all know where that left us! Even after the falls on their stockmarket,
would you believe they are still over 30% above where they were 12 months ago
while our market (the ASX) is down by 3%.
The other issue to
consider is the Chinese government has been scrambling to halt the slide in its
markets by reducing its interest rates. These now stand at 4.6% compared to
Australia’s rate of 2%.
Meanwhile the
economy that’s been on the improve is the US. Their market also caught a dose
of the Chinese market flu! They fell by 10%. That said the S & P index has
been travelling way above its pre GFC peak for about 2 years. This compares to
Australia’s market that seems to be restrained and conservative in comparison
as we have yet to reach our pre GFC peak.
The USA is also
been impacted by the fact that over the last few years their Government has
been pumping money into the economy via several quantitative easings. This was
brought to halt some months ago and hence a correction to their market was
always a possibility. That said their economy still has a reasonably good
outlook.
The conclusions we
can draw is every few years the markets take a deep breath and correct
themselves. It’s expected. It’s part and parcel of the volatility of markets.
If your portfolio is exposed to small caps or high risk companies – they tend
to be even more volatile. If your portfolio is diversified amongst larger
profitable companies then they are likely to recover first and foremost.
At Sothertons understanding risk is part of
anyone’s portfolio management. Markets going up or down should not be a big
concern as long as objectives haven’t changed and your portfolio is
diversified. To understand more call us on 4972 1300.
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