After a period of relative calm over 2012-2014 share market volatility has spiked over the last year as various worries about the global growth outlook intensified. With this renewed volatility a focus on risk in investing and a desire for safety has naturally come. But what is volatility?
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Policy easing in China has gained traction. Six interest rate reductions between November 2014 and October 2015, together with reductions in banks’ Reserve Ratio Requirements and some fiscal support, have seen China’s property market and heavy industries step up a gear.
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After discussion in recent months as to whether the likely sustainable trend rate of Australian economic growth has slowed, along came the December quarter National Accounts showing growth through 2015 had picked up to 3.0%. Certainly that helped rationalise the buoyant labour market in late 2015, but the weakness in wages growth and the relative strength in lower paid more labour intensive sectors of the economy is also a factor.
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Global equities continued their weaker trend falling 1.4% (hedged) in February, with Australian equities following the global lead, falling 1.8%. The volatility was driven by
ongoing concerns that global growth was slowing with some possibility of recession.
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Uncertainty regarding China has been a factor behind global growth worries and share market volatility since mid last year. Put simply the combination of a reversal of gains in Chinese shares, a fall in the Renminbi and uncertainty about the intentions of Chinese policy makers at a time of slowing Chinese growth have fanned fears China was heading for the “hard landing” that China bears have long predicted.
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The market did improve modestly in the second half of the month as excessive pessimism re US economic growth prospects were re-appraised, the domestic profit reporting season ended relatively mixed (although FY16 & FY17 consensus estimates were further reduced) and risk appetite improved in global markets.
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As if the worry list for investors isn’t already long enough – with emerging markets, China, oil, the Fed – politics (or what some call geopolitics because it sounds better) is also figuring large this year as an issue for investors to keep an eye.
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Global equities had a very difficult start to the year falling 5.4% (hedged) over January, with the All Country World Index down 10.0% at the month’s lows. Concerns that global growth was slowing and weaker energy prices were the primary drivers of the sell-off.
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The one big surprise in the ongoing turmoil in financial markets is the role played by oil. Past experience tells us surging oil prices are bad and plunging oil prices are good. But that has not been the experience lately. It seems there is a positive correlation between oil prices and share markets. So what’s going on?
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Despite a reasonable economic backdrop, commodity prices continued to decline during December. The Reserve Bank Commodity Price Index fell 4.9%, with the annual decline 23.3%, led by falls in oil and iron ore.
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