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What’s behind the market volatility?

What’s behind the market volatility?

Market volatility update

Overview

The Global stock markets have had a volatile start to 2016, attributed to weaker manufacturing data in China and the US, and political tension in the Middle East. As a result we have seen most markets recording losses from the start of the year with higher volatility levels.

What’s behind the market volatility?

The main reasons for stock market falls have been further intensified by financial market volatility, weakness in the oil price and government policy issues in China.

In 2016, the price of West Texas Crude Oil has fallen 19% to approximately US$30 a barrel, causing downward pressure on the global energy stocks. While in China, concerns over regulatory change for Chinese equities and lower fixing rate for Chinese currency against the US dollar have strongly impacted the global equities market.

At this point in time China continue to face three challenges:

  1. A slowing economy,
  2. Sharemarket volatility, and
  3. Currency depreciation and capital outflow.

These challenges are likely to remain in place in the short term. We expect the economy growth in China to slow down to around 6.5% from 7% in 2015. The Chinese Government will need to ease policy further through interest rate cuts or amending the banks lending ratio effectively allowing the banks to lend more money.

How have other markets reacted?

Apart from China, there does not appear to be signs of renewed economic weakness in Europe, US and other countries (including Australia). Consequently, any sign of stability in financial markets in China encompassed with an effective economic response should see global market stabilised.

The market is likely to trade with high volatility for the remainder of the 2016 as we’re expecting the US to lift the Fed funds rate as a precautionary measure to place pressure on inflation rate.

What does the market volatility mean for your investments?

Accumulators:

It’s time in the market, not timing the market, that’s important. So if you can ride out the volatile times, you could have a smoother return over the long term. Choosing to diversify your investments can help to defend against volatility and reduce risks. You can diversify across a variety of investment options.

During time of market volatility it is important to manage your expectations. A slower global economic growth rate means a period of lower returns on traditional asset classes. Returns leading up to the recent GFC were abnormally high, so it’s important you don’t use these returns as the norm. So don’t be discouraged when you hear the word “volatile”.

Pre- and post-retirees:

If you’re in retirement or nearing retirement, it is logical you want to protect the capital of your investments simply because you’re relying on the investment return to fund your retirement.

In spite of everything it’s easy to react emotionally but now is the time to keep a level head and stick to your long-term investment strategy. Making drastic change during a downturn or trying to time the market could leave you considerably worse off. It’s a good time to remind yourself that markets do recover and don’t let short-term volatility get in the way of long-term needs.

If you feel like you would like to discuss this further, please contact us.

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