It was a horror month for the Australian share market, as fears over a slowdown in Chinese growth sparked an aggressive sell-off in global markets towards the end of the month.
The All Ordinaries Index fell 8.1% in August to close at 5,222.1 points. Global shares were down with the Dow Jones Index falling 6.6%, the FTSE falling 6.7%, the Nikkei 225 Index falling 8.2% and the Hang Seng Index falling 12.0%.
The recent sell-off is in my view a reaction to:
- China's market volatility and currency devaluation (amid struggles for emerging markets more generally),
- Oil prices' dropping to multi-year lows, and
- Worries of potential Federal Reserve interest rate increases in the United States.
Regarding the volatility within China's share market, it is worth remembering that the Chinese share market rose by some 150% in the 18 month period before the recent slump. As such, the recent decline in the Shanghai composite index has simply taken it back to where it was in early 2015.
Regarding oil prices being at multi-year lows, this ought to be a boost for the United States economy (given its dependence on oil as an energy source). Regarding potential rate increases in the United States, I believe recent events may make the Federal Reserve less likely to take action in the coming weeks.
None of these factors are likely to derail the long-term global economic expansion in my view. However this is predicated on China eventually being able to transition its economy into a consumption based economy. Accordingly, market catalysts such as these are unlikely to disappear in the near term.
Investors should anticipate higher volatility and therefore will most likely benefit from ‘active’ investments that incorporate tactical asset allocation techniques. The chart below compares the most recent performance of an ‘active’ Australian share fund widely held in client portfolios to the All Ordinaries Index.
Source: Perpetual and Yahoo Finance
As shown above, the ‘active’ share fund declined by 2.88% over the period. While not a great result in isolation, in comparison to the broader Australian share market that fell by nearly 8% over the same period it is a good result.
This highlights the benefit of being vigilant with investment selection. In my view, investors seeking growth (as opposed to income) over the medium term would be well served incorporating 'active' investments (with a relatively flexible mandate) within their portfolio.
In domestic interest rate news, the RBA board left rates on hold at 2.00% per annum in August (and is expected to do the same following today’s meeting). The Australian dollar continues to decline (falling by 2.74% in the month) – a trend I expect to continue for the foreseeable future based on Australia’s forecast terms of trade and low resources prices.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.