Reasons to be Optimistic for the Financial Road Ahead

Market update

It’s been a tough start to 2016 for investors, and unfortunately there may be more bouts of volatility ahead over the coming year. The same concerns that occurred in 2015 have continued into the new year, with the main worries being:

• Uncertainties regarding the Chinese economy;
• Concerns that the US Federal Reserve has raised rates too early and its impact on the US Dollar and falling Chinese Renminbi; and
• Geopolitical risks impacting oil prices.

Share markets have seen sharp declines over the first two weeks of 2016 with US shares -5.2%, Eurozone shares -6.2%, Japanese shares -9.5%, Chinese shares – 14.6% and Australian shares -6.8%, wiping out most of the gains seen over the second half of 2015.  Commodity prices have also fallen significantly with the oil price falling towards US$30 per barrel for the first time since December 2003.

What has caused the recent market falls?
The weakness seen this year started with declines in the Chinese share market and currency, sparking renewed concerns about the Chinese economy. This wasn’t helped by some “soft” manufacturing data in the US and geopolitical concerns in the Middle East and North Korea. The renewed depreciation in the Chinese currency (Renminbi) is a key issue at the moment as its decline has provided upward pressure on the US Dollar by pushing down the value of emerging market currencies, adding to weakness in oil and other commodity prices and adding to concerns around emerging market economies.

There could still be more share market weakness ahead in the short term with ongoing uncertainty around Chinese economic policy and a sense that the US should delay further interest rate increases adding to market nervousness. Expectations around further quantitative easing in Europe and Japan may also cause some concerns in markets until the respective governments further clarify their intentions.

There are reasons to remain positive
While risks remain elevated in the short term there are a number of reasons not to be too concerned over the poor start to the year. Some of these reasons are outlined below:

• Recent falls in the Chinese share market have much to do with regulatory issues and government policies than actual economic problems. Regulators recently introduced a new share market circuit breaker which perversely encouraged investors to bring forward their selling – the complete opposite impact of the intention of the rule.
• Whilst profit margins in the US are being squeezed by a stronger US Dollar, a recession is still a low probability. This is important as the US share market is still the dominant player in the world and sets the direction for global markets. Whilst US manufacturing is soft there are no signs of excessive growth in debt or inflation, which generally precede recessions.
• The current environment is very different to that of the GFC as low oil and commodity prices actually provide a boost to businesses and consumers overall. Household debt in the US is also significantly below levels leading up to the GFC.
• Monetary policy remains very easy across the globe. Although the US has begun raising interest rates they are still at very low levels. Across the remainder of the developed world interest rates remain low with a bias to even lower rates in 2016.
• Recent share market falls have seen equities become much more attractive relative to other assets classes, particularly bonds, and there is potential for a floor in share markets to develop in the near term.

Finally, investors should remember that share markets regularly go through volatile patches that can linger for a while. Shares tend to have “mini cycles” where they move up or down by 5% to 10% over relatively short time periods, but the long term trend has proven to be upward.

What does this mean for EISS investment options?
EISS maintains well diversified portfolios that hold a range of asset classes to help protect against sharp equity market movements. Whilst there will be times of negative returns, EISS has a focus on capital protection to minimise the impact of market falls as much as possible.

We continually monitor markets closely and manage the risks in an appropriate manner using our consultants and investment managers to draw on a wide range of expertise.

Always remember that superannuation is a long term investment and it is the longer term performance that is most important rather than focussing on the inevitable short term fluctuations.

Further information
You can call our dedicated Member Services team on 1300 369 901 from Monday to Friday, 8.30am to 5.00pm (AEST).