With a change in calendar year, came a change in investor sentiment - sparking a large sell off in investment markets. The All Ordinaries index declined by 5.4% in the month of January to close at 5,056.6 points.
Global investment markets were weaker across the board. The US Dow Jones Index declined by 5.5% the London FTSE declined by 2.5%, the Japan Nikkei 225 Index declined by 8.0% and the Hong Kong Hang Seng Index declined by 10.2%.
The sharp decline in investment markets appears to be a recurrence of the investment market weakness we saw last August (and I expect much the same result). Importantly, there is no sign of a recession on the horizon for the US or China. There is no collapse in the banking and payment system like there was in 2008.
Given the above, the market fall is clearly driven by a changing sentiment. Investors appear to think that stocks were overvalued and needed to come down. A falling oil price along with news out of China were the catalysts for the sell-off. To panic or not to panic? That is the question.
I continue to believe that China will do what is necessary to deliver a growth rate for 2016 that is very close to its growth target of 6.5% (which is very strong by any developed market comparison). However, I do expect increasing volatility from quarter-to-quarter in the Chinese economic growth rate (as China transitions from an investment-led economy to a consumption-led economy). Consequently, volatility will clearly remain in investment markets for the foreseeable future.
Because I do not believe that a US recession is likely this year, I view this sell-off as a temporary correction rather than the end of the almost 7 year US bull market. The US economy is improving steadily with GDP growth at approximately 2.5%, wages growing at 2%+ and the unemployment rate close to 5% (which I would deem close to full employment).
In summary, I expect 2016 to present a challenging environment for investors and it has certainly has started out that way. However, I do expect the global market to recover from these lows as fears of an impending global recession fade (much like we saw following the weakness in August).
In domestic economic news, the RBA board meets tomorrow to review interest rates. Consensus expectations are that the RBA Cash Rate will remain at 2.00% per annum. The Australian dollar fell by 3% in the month of January, with 1 Australian Dollar currently buying 70.87 US cents.
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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.