What global volatility means for Aussie investors

The word “volatility” is music to the ears for some, but a truly horrible word for others.

For short term traders it’s a wonderful thing: as the market rises and falls sharply it creates a myriad of opportunities to trade the market.

For others, it creates anxiety and casts doubt over whether the market is stable and valuable.

Either way, assuming historical market trends hold true, it doesn’t matter.

Traders can enjoy and take advantage of the market swings, and, over the long-run, those after a capital gain or dividend income will likely get rewarded if they have chosen companies generating strong incomes.

So what about those who are currently drawing down their super, or those very young investors who are keen to know whether now is the time to get into the market?

Or what if you’re not sure whether to put your savings in a term deposit or mutual fund (money club for investors)?

Below I’ve outlined what you need to know. Think of it as a kind of weather forecast for investors.

Also read: Fear and irrational trading driving stocks down

Fears about China

Last week China released its much-anticipated economic growth figures. Depending on which measurement you use, the world’s second largest economy would have us believe its economy is motoring along with around 6.8 – 6.9 per cent growth. Who knows if that’s accurate? I don’t.

There are plenty of economic and market pundits out there though that estimate it could be as low at 3 – 4 per cent.

The accepted wisdom though is that China’s economy is slowing. Indeed growth – officially even – has dropped off to its lowest pace in a quarter of a century.

The best way bring you up to speed on China though is by posing two simple questions, which I will then answer for you:

Is China slowing too fast? Will there be a hard landing?

The short answer is we don’t know. That’s why the market’s tummy is so upset. Economics experts that have even more experience than me … yes there are a few … tell me over and over again that it’s uncertainty that’s driving these market convulsions.

What we do know is that the Communist Party has tried various different policies (freezing stock market trade / devaluing and revaluing the yuan) in an attempt to arrest the market’s concerns it’s lost its tight grip on the economy. It only seems to have made matters worse though.

What we also know is that China’s transition for export-led growth, to a more consumer led economy isn’t going smoothly.

Even the latest data show this. Retail sales growth was robust, but still missed analysts’ expectations. Meanwhile global sea trade – for which China contributes significantly – is slowing.

The Baltic Dry Index, for example, measures how active ships are on the open seas – carrying cargo, like commodities. It’s currently around its lowest levels on record… lower than it was during the Great Recession.

The index is at a level which indicates there are too many ships out at sea competing for not much cargo. That’s not a great sign for China ‘bulls’.

During 2016 you can expect to see more Chinese stock market intervention, and more efforts to stimulate the country’s economy. Perhaps of most significance though is that I think there will be more currency massaging.

That currency manipulation is also what seems to spook the markets so much – basically because it’s such an obvious cry for help. Keep a close watch on China – it’s highly unpredictable at present, but hugely important to Australia’s economy.

Also read: Chinese stock markets halted for day after shares fall 7%

US interest rates

Australian financial markets and the economy to a lesser degree are influenced by US interest rate policy. It’s a real bugger but the institution itself – despite being the biggest of its kind in the world – is not confidence inspiring.

Here’s a hilarious brief history of the Federal Reserve and its Chairmen: Alan Greenspan presided over the boom of the sub-prime mortgage market (helped by the explosion of those worthless Collateralised Debt Obligations or CDO’s).

Ben Bernanke then tried to fix it all by printing money when the global financial system froze over. Now the current Chair, Janet Yellen, is trying to convince Wall Street the economy is strong enough for the bank to actually tighten monetary policy or raise interest rates.

The prospect of rising interest rates in a low-growth and low inflation environment has seen one of the worst starts to the year for Wall Street on record.

So will Ms Yellen hold her nerve and keep raising rates, or will she back down and allow Wall Street to go back to ‘sucking its thumb’.

If she raises rates she risks snuffing out the small amount of economic growth that exists. If she keeps rates on hold indefinitely, she risks creating more asset bubbles that will ultimately have to pop… painfully I suspect.

Naturally investors are worried about what will happen, and, frankly, again, no one knows what’s around the corner. It’s why independent economist, Saul Eslake, and veteran City of London analyst, David Buik, say now is not the time to be investing in risky assets.

Oil

Good ol’ oil. I won’t bore you to death with this because it’s been all over the media recently.

Basically the demand for oil is a great barometer for “demand” more generally. When oil is languishing it’s not a great pointer to the health of the global economy. Indeed at the World Economic Forum in Davos last week accounting firm, PriceWaterhouseCoopers, reported that international business confidence was at a 3 year low. Y

es, oil has plummeted and it’s telling a wider story of a frazzled business environment, not a bullish one. Oil did manage to rally over the weekend to above US$30 a barrel but few believe the price has bottomed.

Stuff you may or may not know about

If you’re trying to forecast the weather there are various indicators you look to. Examples include fronts, troughs and pressure systems. Here are some other indicators to watch out for that may drive market sentiment in the coming months.

There is in fact a direct measure of volatility in the United States. It’s called the VIX Index. It’s traded on the Chicago Board Options Exchange and measures volatility.

It’s nicknamed the “fear index” because volatility is associated with anxiety and worry.

A week ago it rose sharply. It’s nowhere near global financial crisis levels but it’s worth keeping an eye on all the same. As I’m writing this it’s trading under 30 points. I’d be alarmed if it started trading above 50 points.

It’s also worth keeping an eye on the UK housing market. David Buik (mentioned above) recently told me that UK house prices were at “eye-watering” levels and that the market was “madness”.

Of course it all comes back to record low interest rates. Interest rates are some way off from rising in the UK, but if there is a housing collapse in the UK then that would be bad news for most investors right around the globe.

Closer to home: I’m told there is the potential for a “resources crisis”. That is, miners are bleeding money as commodities prices fall. Many also have large debt loads.

Some of the world’s big miners, I’m told, could be at risk of defaulting.

That could spark global credit concerns, and, of course, fears about how exposed many of the major banks are to the resources sector. It has the potential to be bigger than the credit crunch of 2008.

Also read: China's lowest growth for 25 years: what does it mean?

Stepping back a bit

There’s heightened volatility on global financial markets right now. That’s because there’s an ongoing battle between ‘bulls’ and ‘bears’. It’s representative of the fact that even those who are in the know can’t work out which way to bet – one way or the other.

On April 27 last year the bench market ASX 200 Index was trading at 5,982 - the latest market high point since before the global financial crisis.

It’s now moving up and down around 4,900. The market’s clearly lost a lot of support and confidence is low.

The seas are simply too choppy for smooth sailing, but if you like a bit of rock’n’roll, frankly, it doesn’t get much better than this.

For longer term investors it’s never been more important to find companies with solid long-term earnings potential.

Gone, for now, are the days of simply riding a nice selection of so called ‘blue-chip’ stocks on the market. Investing’s become a bit of a contact sport, and the more mentally fit you are, the more likely you are to come out on top.

Postscript

Markets rallied late last week, so we’re in the clear, right?

Global markets rallied heading into last weekend because of the tantalising promises of more stimulus from the European Central Bank (ECB), and speculation the Bank of Japan may move to soothe markets as early as next week.

Call it a ‘sugar high’ for the markets, or much needed medicine, I expect other central banks may follow suit in coming months because the pain of enduring a bear market is all-too acute.

I spoke to three contacts of mine on the weekend about this: TD Securities’ head of Asia-Pacific Research, Annette Beacher, said “no one feels safe”; stock broker Marcus Padley told me he’s “not going to hit the buy button yet”; and the NYSE’s Stephen Guilfoyle said, in response to whether the market would continue to rise this week… “I hope it does, but I can’t promise you that.” That’s a small cross section of what people in the know are thinking.

 

David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator. You can follow him on Twitter: @DavidTaylorABC.