September and October are months where historically you watch out for an overreaction to any bad news.
Famous October crashes include: ‘The Panic of 1907 ‘, ‘The Crash of 1929’, ‘Black Monday’ (1987).
Needless to say, we all get a little restless this month, even if the fundamentals are sound.
So why are we seeing this sort of volatility?
The US markets have been setting the pace (now approx. 60% of the world share markets) and they have been driven by strong earnings growth, big government expenditures and tax cuts. Even now, analysts have been happy with the reporting season, with many US companies increasing their earnings in the 19-20% range.
World Gross Domestic Product (GDP) growth is still favourable and interest rates, while rising, are still historically low.
Here in Australia, the media is so busy paying attention to a non Australian resident living in Singapore (with the popular surname of Turnbull) that they have managed to miss the great results we are seeing economically, both in bringing the budget back into surplus and sustaining the best GDP growth numbers (3.4% for the June Qtr.) since 2012. The recent tax cut announcement for small to medium size businesses will give businesses confidence and can only assist the longevity of this growth.
There are headwinds:
- The US is upsetting the Chinese and the Iranians. One with trade barriers and the other through sanctions.
- US rates are rising which sees large amounts of capital leaving ours and other world shores and flooding the US bond market. This pushes up the US dollar, which makes us look relatively cheap but increases the costs of our imports.
- The US growth rate is likely to provide inflationary pressure through wage rises, which would push rates even higher.
- Domestically we have seen banks tighten their lending criteria (making it hard to borrow) as well as government controls on foreign investment. Additionally interest rates have risen as world competition for access to funding has pushed up costs.
- This has seen losses in the Sydney (-5.6% annually) and Melbourne (annually -1.7%) property markets (figures at 31 August 2018).
So, what are we doing?
While we are monitoring the situation closely, the information we are receiving is that this is an adjustment caused by the US markets recognising the fact that they have factored in growth rates that are unsustainable over an extended period. Not a surprise to us, as our analysts have been positioning for this over the last twelve months.
Additionally, we rebalance all our model portfolios back to strategic benchmarks every quarter so on 30 September we took profits in international markets and spread the proceeds across the other asset classes.
Lastly, the underlying managers, as flagged above, have been concerned about valuations for over twelve months now and accordingly have been holding larger amounts of cash than usual waiting for just this sort of opportunity to buy.
We will continue to see volatility and the press will be working on ‘shock and awe’ headlines trumpeting “Billions of dollars wiped off the value of world share markets!!” but the real damage has been seen in very overpriced stocks, like the ‘FAANGs’ – Facebook, Amazon, Apple, Netflix and Google (Alphabet).
There are opportunities in any sell off and that is the feedback we are receiving from our analysts.
That being said, volatility can cause unnecessary stress so if you have any concerns please talk to us about the options we have available.