Sharemarkets around the world has experienced its most tumultuous trading week since 2008. During the week, the S&P/ASX 200 index had traded in a 450 point range.
A series of events created this rollercoaster ride. It all started with US policy makers and their inability to address the issue of the US debt ceiling and the resulting downgrade of the US’s credit rating from AAA to AA+ by Standard and Poor’s (S&P). This was then followed by rumors and escalation of concerns about the stability of French banks and the further deterioration of the european sovereign debt situation with Italian and Spanish bonds in the spotlight. All these factors combined lead to a lack of confidence and poor sentiment and resulted in the recent sell-off.
But taking a step back, what has changed this week? Not a lot has really changed that would have resulted in the wild market behaviour. Investors have known for some time that:-
- S & P and the other ratings agencies had put the US on negative outlook since April 2011;
- The US economy is and will remain fragile; and
- The existence of soverign debt issues in Greece, Italy and Spain.
Thus the recent sell off can only be attributed to the fact that there is a lack of confidence in the market rather than actual corporate or economic fundamentals.
Whilst Australia has not been immune to these global geopolitical issues; however there are a number of positives that are stacked in our favour. These include the relatively high interest rates when compared to the US and Europe and secondly strong balance sheets of many Australian companies. These alone cannot protect the Aussie sharemarket from short term shocks, but in the long run, it gives it the ability to bounce back faster.
Looking ahead, it does look like the volatility we have experienced over the last couple of weeks will unfortunately remain. This is until we get some sort of strategy that deals with debt reduction in the US (instead of continuing to print money to meet debts as they fall due) as well as the soverign debt issue in Europe is solved. Once these fears are eliminated, confience will eventually be restored.
Hey, Alfred here – Did you enjoy my latest article? Do you have any questions or Feedback for me? Call me on (02) 9266 2269 or Book an Appointment online.
Remember that our first meeting is cost and obligation free.
