After a positive first quarter to the financial year, October provided a reminder of the risks of investing with both global and Australian share markets falling by over 5%. International share markets were lower across the board, however weakness in the Australian dollar (AUD) provided a small buffer for unhedged investors. The Australian share market fell by 6.1%, with some sectors dipping by over 10%. Fixed income proved its worth as a diversifying asset, returning 0.5% for the month.
A reminder of short-term investment risk and the need for a long-term outlook, the share market wobble in October was similar to the sell-off that occurred in February/March 2018. The US drove the falls, despite strong economic fundamentals continuing.
Rising US interest rates and signs that the profitability of US companies may be peaking have received most of the blame for the falls, with a number of companies reporting results which disappointed investors. The technology sector was particularly badly hit over the month, down nearly 10%. Continuing tensions between the US and China on trade and the introduction of further tariffs in October were also seen as adding downward pressure to share markets.
In terms of economic data, the US continues to lead the world in economic and jobs growth with the unemployment rate remaining at historically low levels (see chart below).
Another positive for the global economy was the US, Canada and Mexico reaching a compromise to save the North American Free Trade Agreement (NAFTA) (now called the United States Mexico Canada Agreement). This removed some uncertainty on trade, but US-China negotiations will continue to dominate headlines for some time.
Despite the strength of the US economy inflation remains low. Some investors are worried that such low unemployment will start to drive wages higher, which may cause the US Federal Reserve to raise interest rates faster than expected.
This is something to watch over the next few months as an indication that US rates will rise faster than expected may negatively impact share markets.
Outside of the US, major central banks have maintained steady interest rates with uncertainty on unemployment and inflation the main concerns.
In Europe, the main headline over the month was the European Union’s (EU) rejection of Italy’s budget due to an apparent breach of EU fiscal rules. This is likely to have added to investor anxiety in October along with continued concerns about Brexit. Italy is expected to resubmit a new budget in November, however at this stage it is unclear if the Italian government will be willing to meet the EU’s demands for a more fiscally conservative budget. The penalty for not complying could be severe, including sanctions and significant fines.
The Australian economy continues to perform moderately with the main concern being falling house prices in Sydney and Melbourne. At this stage, with prices down around 7% in Sydney over the past year, there are no major concerns. However, if this translates into lower consumer spending, the Reserve Bank of Australia (RBA) may become concerned about the growth of the economy. That said, the RBA is comfortable with interest rates where they are at 1.50% and it is expected that they will stay there for some time to come.
Overall, share market falls of 5-10% are normal and should be accepted as a part of investing in shares. Selling after the share market has fallen often results in losses being locked in and can result in a poorer long-term outcome. Despite recent losses the Australian market remains in good long-term shape. An important point to remember is that a diversified approach to investing can help shield your money against larger losses in more volatile times.
1 Source: Bloomberg Finance L.P. Past performance should not be regarded as an indication of future performance.
2 US Burea of Labour Statistics, Bloomberg Finance L.P.
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