Update Jan 2016

Investment market update January 2016

Update Jan 2016

You might have noticed in the news recently that the share market hasn’t had a very good start to the year.  In fact, it’s down 7.6% over the first 2 weeks.  So we thought we would share the thoughts of Dr Shane Oliver and others at the AMP Capital team for you.  Here’s a link to the report: a-rough-start-to-the-year .  In summary:

What is going on in investment markets?

  • Worries about China, global growth and falling commodity prices led by oil continue to rattle investors
  • With worries about global growth likely to linger we could still see more downside in share markets in the short term that could see Australian shares follow emerging markets into a bear market (defined as a 20% decline – as measured against last year’s highs).
  • However, there are some positive signs, including
    • Lower oil prices should be a boost to global growth
    • Economic data has been mostly ok over the last week
    • It’s getting to a point where Central Banks could start to act

What are their thoughts about the investment outlook?

  • Worries are likely to drive continued volatility in share markets in the short term until some stability returns to commodity prices. Beyond the short term we still see shares trending higher helped by a combination of relatively attractive valuations, continuing easy global monetary conditions and continuing moderate economic growth. But expect volatility to remain high.
  • Residential property price gains are expected to slow to around 3% this year, as the heat comes out of the Sydney and Melbourne markets.
  • Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5% and the RBA expected to cut the cash rate to 1.75%.
  • The downtrend in the $A is likely to continue as the interest rate differential in favour of Australia narrows, commodity prices remain weak and the $A undertakes it’s usual undershoot of fair value. Expect a fall to around $US0.60 by year end.

Implications for investors

  • In the absence of US/global recession, which still seems unlikely, it’s hard to see a GFC style bear market.

The key for investors is to recognise that shares offer a higher return potential after sharp falls, selling after big declines just locks in a loss and that dividend income from a well-diversified portfolio is little affected by share market volatility.

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