October 2014 Newsletter -The market is in turmoil but is it all doom and gloom?
The market is in turmoil

The market is in turmoil

But is it all doom and gloom?

The Local Share Market fell away in September and the fall has continued into October. 

Indeed, from its peak in August, the ASX 200 has now fallen 9.8%. Internationally, while the US and European markets held their ground for a while, both markets have since suffered similar falls, with the US S&P 500 down a total of 7% since August (including 3.9% in just 4 days). 

There are disparate forces behind these market falls, however the primary driver is a more pessimistic global economic outlook.

The IMF has cut its forecast growth figure for 2015 from 4.0% to 3.8% (although this is still ahead of 2014's 3.3%). This downgrade in projection adds to the pile of what the IMF has termed "serial disappointments" in growth. Even this projection of 3.8% is relying on a reduction in the geopolitical crises in Iraq/Syria and Ukraine/Russia. 

It's important, however, to put this situation into context by comparing it with the GFC.

Global growth for 2008 was 3% and in 2009 it was -0.5%. Comparatively, the current economic situation is nowhere near as dire.

Locally, the fall in commodities (iron ore, coal, oil and gas) and the expected headwinds to the banking sector has caused a fall in Materials/Mining and the Finance sectors. These two sectors comprise 70% of the ASX 200. 

Looking at each separately:


The Mining Sector
The Mining sector is a cyclical market. Booming global demand sends commodity prices higher and, as these prices rise, more marginal projects and mines are developed, gradually increasing supply. 

Then, as the supply comes to a peak, demand often starts to fall away and the prices can fall. Historically, these falls can be quite rapid. This results in the marginal mines and operators struggling to remain profitable. 

Currently Iron Ore is Australia's largest export. This year the price has fallen from $114 in April to below $79 at the end of September, or a fall of 30.7%. At this price there are perhaps only three miners globally that will continue to make a profit. They are Vale in Brazil and Rio Tinto and BHP Billiton in Australia. 

The key point is they should continue to make profits and pay dividends.

The Finance Sector
The Finance sector in Australia is the largest single sector, representing 45.5% of the Australian share market.

Share prices in this sector surged recently on the back of a housing price boom and increased lending. 

The fall from these peaks is as a result of many varied reasons, not least of which is the pervading feeling that "they were due for a fall". 

However, as with the mining stocks mentioned above, the banking sector in Australia continues to make good profits and continues to pay dividends.

Given that these two sectors have been responsible for the majority of the correction in the Australian share market, but are forecast to remain profitable, investors should not be too concerned. The core philosophies of investing in the market, including taking a longer-term view, remain relevant.

Indeed, taking a long term view and investing in profitable companies has helped Warren Buffet finish in the black almost every year in half a century, making him the world's third richest man and earning him the reputation as its greatest investor.

So, as a final comment on short term volatility, I will leave it to Warren Buffet:

"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.' Source: The New York Times, October 16, 2008.

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.

For more information please contact your Goodwin Chivas & Co. Advisor. 

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