Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
Share markets around the world – including in Australia – have performed strongly so far in 2019, so much so that we are at risk of a correction or pull back.
But should that occur, it doesn’t mean investors should panic and sell their shares.
Looking back, investors have been on a rollercoaster ride for the last 12 months. We started 2018 off optimistically, but around February markets wobbled on concerns about the US Federal Reserve raising interest rates.
Those concerns reached a crescendo in December when share markets fell sharply from their August/September highs; the US market slumped 20 per cent and Australian shares lost 14 per cent of their value, on the back of a range of fears including around the prospect of an overly aggressive US monetary policy stance, the US/China “trade war”, a slowdown in China and the impact of the partial US Government shutdown.
In the first quarter of 2019 we have seen a good rebound, with many of those concerns fading or disappearing.
The shutdown in the US is over, global economic data has slowed but not collapsed and there are some positive signs for growth, and trade war fears have dissipated as the US and China have entered what so far appears to be productive talks.
Markets have also been boosted by stimulus measures, particularly in China, and central banks, most notably the US Fed, have softened their policy stances.
To put this bounce in context, the rally in the US from their lows on Christmas Eve to their recent highs was 23 per cent – a pretty good rebound. (Australian shares have had a 15 per cent gain since.)
But no market goes in a straight line, volatility is a given, and after those big rallies we are vulnerable to a bit of a pull back or consolidation.
A possible trigger for a correction is concern about global growth. Economic data has been consistent with some further slowdown into the March quarter and concerns abound about the yield curve inversion in the US – which many investors fear is a warning sign of a forthcoming recession.
Outlook still positive
With the risk of a correction, should investors panic and sell their shares? I don’t think so.
Even though there are risks of a short-term pull back, I think overall this year will be a reasonably positive one for share markets.
There are several reasons for that including:
- Share market valuations are still ok;
- I think global growth will pick up in the second half of the year. We’re seeing the impact of the Chinese stimulus come through in business surveys and that will certainly help Europe which is very exposed to exports to China;
- The US Fed had softened its monetary policy stance and that will help the US economy; and
- The emerging world is looking a bit better as well.
The combination of improving growth, okay valuations and still relatively easy monetary policy globally should see this year as a good one for shares, notwithstanding the risk of a short-term correction or pull back in markets – both globally and also in Australia.
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