The All Ordinaries index declined by 2.1% in February, to close the month at 4,947.9 points. In the first two months of 2016, the Australian share market has now fallen by 7.4%. As with any market in which there are big price drops, opportunities are opening up, but having the conviction to act is another matter.
Global investment markets were mixed in the month, although generally weaker across the board. The US Dow Jones Index gained a modest 0.3%, the London FTSE gained 0.2%, the Japan Nikkei 225 Index declined by 8.5% and the Hong Kong Hang Seng Index declined by 2.9%.
Anxiety among investors and in the market is greater than it has been for some time, despite the lack of substantive change in global fundamentals. Volatility has gone up, but not dramatically, and remains well below panic levels seen in 2008.
The global economy continues to grow thanks largely to the US economy. The chart below shows the US unemployment rate at its lowest level since 2008.
The US economy has clearly been an important driver of the global economy and while it will continue to grow, the rate of growth may reduce. Europe continues to recover but it is occurring slowly. Japan is a concern where, despite considerable policy stimulus through 2015, growth is modest at best. As for China, which is vitally important to Australia’s economy, its economic growth rate remains the envy of the world.
Nevertheless, recent indicators reminds us that the adjustment China is attempting to engineer for its economy to one with a greater consumer and services orientation will not always be smooth. There are higher risks around the management of the Chinese currency, which could lead to further foreign-exchange devaluation or more government capital controls (both of which will result in higher market volatility in the short-term).
My view remains that the global economy, while not growing at a rate previously expected, continues to grow at an acceptable pace. It is hard to view the current events as a repeat of the economic conditions that led to the Global Financial Crisis.
The impact of China’s economy rebalancing is likely to remain a headwind, particularly for countries that have relied on its appetite for raw materials (like Australia). However, this is likely to be counterbalanced by the continuation of the various accommodative monetary policies that are in place around the world, as well as the boost to consumer spending power from lower energy prices in many countries.
The RBA board meets later today to review interest rates. In February, the RBA Cash Rate remained at 2.00% per annum. The Australian dollar gained 0.8% in the month of February, with 1 Australian Dollar currently buying 71.43 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.