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October has (once again) spooked the markets in the lead up to Halloween and so we have had some interesting conversations with some clients recently around the stock market volatility and the sensationalist media headlines that inevitably follow.
As your Chrysalis advice team we’re constantly paying attention to market volatility across all asset classes, including the recent market falls in the Australian Stock market. This allows us to cut through the media noise that generally does more harm than good. With this in mind we wanted to provide you a quick overview of what is driving some of the current stock market volatility and reassure you that your advice team are staying on top of these drivers and available to answer any questions or concerns you may have.
In short, the economies of Australia, the UK and the US remain strong. The US economy is particularly well placed for growth, with strong business confidence, ongoing investment and an unemployment rate of 3.7% which is a level that hasn’t been seen since 1969. The Australian economy is doing reasonably well with unemployment trending down and an orderly softening of the property market so far. However as outlined in our previous articles on our website/latest news, we expect softening in property to remain as lending standards continue to tighten. European economies have continued to be mixed in their growth opportunities, however Germany and the UK are particularly strong growth prospects. These two markets are where the majority of our European exposure sits within our portfolios and should remain supportive of future returns.
So if the underlying economies that we are invested in are so strong, why has the market dropped over recent weeks?
Great question! In short, uncertainty drives volatility and two major sources of uncertainty in the markets currently are:
- ‘Removal of easy money’ – following the Global Financial Crisis (GFC) governments injected significant amounts of cash into their respective economies. This allowed both individuals and companies to access money easily and cheaply. Doing so drove improved economic growth out of the GFC and provided the returns we have experienced in recent years. With the GFC now behind us and growth returning to a more sustainable long term level, governments are removing this excess cash from their economies, bringing with it uncertainty as to how exactly this will impact individuals, business and country growth plans. Given the extent of this free money globally, no one is exactly sure how it’s removal from economies and markets will impact investors in the short term.
- Political risks and uncertainty in leading economies and, in particular, the potential trade war between the US and China.
We are not expecting this uncertainty to subside anytime soon and we expect the current cycle of volatility to continue. As a result investors must remain grounded with regard to their return expectations as returns will likely be lower over the remainder of the current economic cycle.
So what does this all mean for you?
As you have heard us say before, volatility is a normal part of investing in growth assets and unless we advise you otherwise, the importance of staying invested during these periods is vital. In fact these times can represent decent opportunities for those who remain invested as fund managers look to re-position their holdings and take advantage of cheaper buying opportunities in the market. Everyone likes a good bargain and fund managers are no different as they search for this during times like these.
By following this approach and partnering with Chrysalis, our clients have experienced above average returns over recent years and we expect this to continue into the future, albeit with lower returns likely in the next period ahead. Importantly the team at Chrysalis are always available should you have any questions or concerns.
If you would like to discuss this further or have any other issues or concerns you would like to discuss please do not hesitate to get in touch with Phil, Mike or Jo. We are always happy to take your call.
