The Big S for Australia

Thursday, January 21st, 2016

Australian share market investors could be excused for thinking that the Australian sharemarket deserves a bit role in the recent smash hit movie, ‘The Big Short’ given its extraordinary volatility over the last 6 weeks. But is the market indicating some real problems or is it simply reflecting offshore events?

The chart below shows a 8% fall in the first two weeks of December, followed by a year end rally of 10%. Since January 1, the market has fallen again by nearly 10%.

blog20160120_Fig1

Figure 1. S&P/ASX 200 (December – Present)
Source. Thomson Reuters Datastream

 

The hyperactivity has given rise to much speculation as to what is causing the recent falls. However the proper question may have been to ask what caused the miraculous end of year rally? Could it have been market manipulation or did Santa Claus just come late?

The volatility is shown more graphically in the next chart that covers the sustained 9 months correction since 31 March 2015. The rally in the index to 5300 at the end of December cut the correction to just 700 points or 11%. However, as at the 18th January the price correction moved towards 20% or nearly 1200 points. Since March the Australian share market has devalued by over $300 billion and a US domiciled index investor has lost about 35% on the value of their Australian portfolio.

blog20160120_Fig1

Figure 2. S&P/ASX 200 (Since 31 March 2015)
Source. Thomson Reuters Datastream

 

The above charts and observations show that the Australian share market has arguably been in a bear market for the last nine months. The fall concurrent with a 15% devaluation of the Australian dollar reflects poorly on the Australian corporate sector. The stimulation from a weakening currency, growing employment, historic low cash rates and substantial inbound tourism growth is simply not transferring itself into higher reported profits. Indeed, if the $A had not depreciated since March then we can speculate that the share market would have fallen much further.

There are further issues that should be considered when reflecting upon the share market decline.

First, equity markets are predictive and the declines need to be analysed to see if they are giving investors an insight into the issues that confront the Australian economy. The sustained weakness in bank shares may suggest trouble lays ahead for residential property markets given the high exposure of Australian banks. The fall in resource stocks shows that the decline in the $A has not been sufficient to offset commodity price declines.

Second, the share market has declined despite the support of historic low bond yields. This suggests that the support to equity prices of lower risk free rates is being totally offset by lower earnings projections. The market is reflecting sustained lower growth and possibly a deflation or very low inflation cycle; and

Third, the market decline is in spite of a solid rise in employment that normally suggest that income, consumption and therefore the economy should all be growing solidly. The contradiction seems to be created by slowing income or wages growth that could be symptomatic of growth in low paid services jobs rather than higher paid skilled occupations. The transitioning of the Australian economy seems likely to result in lower per capita real wages.

Notably many commentators have laid the blame for the recent market decline on the economic machinations in China. Whilst the Chinese economy does and will have a significant effect on the Australian economy it appears to us that it is overused and is a convenient smokescreen for avoiding a proper economic analysis of the difficult outlook for Australia. Indeed this is where the stock market, when free of manipulation, does paint a realistic picture of the future. Therefore the recent correction, in the context of nine solid months of declines suggests that the economy is in for a tough period in 2016.

Register for our Investing Report

Weekly insights, research & market commentary.

* Required fields

22 Responses to “The Big S for Australia”

  1. Thomas Regan says:

    very good analysis

  2. Paul B says:

    …Don’t be surprised if Australia goes into free fall over the next year, and heaven forbid….. the “R” word takes place for the first time. Maybe a good thing, given the Y-GEN have not experienced it, and Aust is due for one.
    If your cashed up, get ready for a Fire-Sale, and some great bargains ahead.

  3. rICHARD cLARK says:

    I AGREE WITH YOUR COMMENTS.TTOO MUCH BLAME IS LAID ON CHINA-NONE ON A RECALCITRANT GROUP IN THE SENATE WHOSE ECONOMIC ILLITERACY ALONG WITH ALP DOGMA PREVENTS INDUSTRIAL RELATIONS REFORM AND ITS CONSEQUENT MARKET CONFIDENCE BUILDING.AND BUSINESS IS SPINELESS

    • peter c says:

      Industrial relations reform is code for lower wages/conditions for the majority. Lower wages means lower growth. Sure the top 5% will become wealthier, at the expense of the majority. We don’t want to become a low wage country, what we need is a genuine high tech, high value economy (like Germany). What’s the point of creating part time and casual jobs for cafe workers? Nurses, IT, engineers and architects are the jobs of the future. The Senate is the way it is because that’s what the Australian people want. You cannot trust either the Liberal/Nationals or the ALP, and that’s why so many votes went to the minor parties from both the left and right.

  4. Robert Inglis says:

    Interesting and thoughtful but falling market is good not bad news if we are looking for buying opportunities. Question is are falling prices creating buying opportunity, one would think there would be some buying opportunities amongst the many listed companies. The economic macro ebbs and flows are interesting but of most interest to index funds possibly.

  5. carl says:

    A very sober and well explained view

  6. rory says:

    I think u left out the 4th factor in the current market eg PSYCHOLOGY
    How much effect is fear and media attention of the negative to really
    encourage that fear, stimulating investors to panic ?

  7. Peter Turnbull says:

    There is no doubt many outside factors are at play Chinese economy overheating , Europe being over-run by African and Middle eastern asylum seekers , The oil price slump , and the ongoing Islamic strife. However in addition the markets are being influenced by short-sellers and those manipulating markets by the use of sophisticated computer algorithms which is unsettling for longer – term investors leading to panic selling Essentially most Western economies are not doing too badly Peter Turnbull

  8. Roy Heath says:

    What I’d like to know is why SHORTING is allowed, to the detriment of the thousands of small investors in the market who haven’t the money or facilities at their disposal to “join the party”. To me, it opens so many opportunities to the big boys and denied to the littlies. Any comments???

  9. Lee says:

    Roy – it seems that every time the market goes down, short-sellers are to blame. I believe this to be mis-directed. For starters, will you accuse them of driving the market higher, when they have to cover (i.e. buy back) their shorts? No! Instead, a bullish fundamental reason will be always be found to justify a market rally . And you, as a ‘littlie’ have every opportunity to play the short side via ETF’s, or investing in ‘active’ funds that go both long & short. And remember, when you buy, you need someone to take the other side of the trade, which may well be a short seller. They are not the demons they are made out to be, but actually add liquidity to the market which is a good thing. Blaming short sellers for market declines is an easy & naïve excuse, with all due respect. Markets can not always go up, and there have been plenty of major market selloffs over the years that have occurred when short selling was not available. Lastly, you may want to sell a stock during a major decline, and the only buyers that are there to take the opposite side MIGHT just be a short seller who is covering his position, therefore giving you the opportunity to get out.

  10. Flappy says:

    When almost 40% of Australia’s GDP comes from China you cannot just dismiss the impact of the Chinese economy. Secondly 55% of Australian mortgages are on investments properties and there is a huge influx of property speculators and thirdly with all the shorting going on, you’d have to be blind Freddie if you couldn’t see the future of the Australian Economy.

    Where is all the Australian innovation? As an Australian living Overseas it is pretty plain what’s going on in the Banana Republic. Easy money making through property speculation and selling natural resources is going come to an end very quickly.

  11. Mlord says:

    Flappy that analysis is pretty misdirected and talking about a Banana Republic is with all due respect simplistic. As an Australian working In Australia (not an observer sitting overseas) i can see why Australia will do well. To call Australia a mining pit and housing debt hell hole ignores so much else that goes on In Australia. What do you suggest? Maybe come home and help pay some taxes, then You can criticise. Innovation? Try Atlassian, you heard of Blackburn’s, CSL, Macquarie Bank, WiFi (invented here). Plus a dynamic financial services sector and what will be a quickly growing tourism sector. Look a bit harder mate next time you come home

  12. Al says:

    Brilliant analysis!

  13. Dougal says:

    Great article. And, yes, I think Australia has some headwinds for a while. However, not enough to worry long-term investors – it just gives us an opportunity to add to some of our holdings. Good assets will bounce back in the long-term.

  14. Des says:

    Is there any hope that ANZ bank will recover in the next 12 months or is it a lost cause.

  15. Chris says:

    I am surprised that your article has not mentioned a much more bear disruptive factor which is the fall in oil price, possibly to $20/barrel. While a stimulus to consumers and oil using industries like transportation, it will place a huge strain on financial institution P&L’s and Balance Sheets. Loans world wide outstanding to oil and gas explorers and high cost producers are very large and cash flows not sufficient to meet scheduled repayments. Watch this space. Suspect the market destruction of ANZ share price might well have something to do with a pending major resource loan default.

  16. Rkhettry says:

    In spite of the decline for the last 9 months, the advisory industry seems to have buried it’s head in the sand and waiting for the crisis to blow over. They could be a bit more proactive on behalf of their clients rather than blame it on China.

  17. Hi

    having worked in china since the mid 80’s I have walked the walk and seen the physical output generated by the deployment of capital both private and government. initially (1980-1995)it was all about generating production capacity (factories) mostly in partnerships with foreign entities. These projects mostly made goods for export. factories usually included worker accommodation because we had bring workers in from other cities/provinces. As time went by the wealth generated in private factories allowed workers to buy apartments and move away from government housing /schooling and health. This housing and factory development ballooned at the same time as exports were ballooning due to the world’s fascination with the $2 goods available from china and hence the extraordinary growth of raw material imports.
    As the world substantially slowed exports have shrunk. Ridiculous over building (similar to the Malasian exceess of the late nineties ( they still have empty buildings from those days) has also ground to a halt (CCB intervention).
    Our raw material exports are therefore been affected and will continue to be affected for some time as the backlog clears. fortunately China is much larger that Malaysia and there’s still some 500M + people on the land. They want to move up to a better life so in due course but hopefully with better management construction will resume.

  18. Jason says:

    Bob, market is predictive only in longer term timeframe, but not short term 2 weeks bounce here and there. eg, from 6,000 down to 4,800 over the longer term is predictive of economy not doing well. Santa Clause rally is just short term noise.

    • Clime Asset Management says:

      Jason/Bob,

      We are sorry to hear that you do not feel that this report was of interest to you.

      We have been very happy with the positive feedback from other readers (which you will see below), and would also advise that the article was picked up by, and republished in a number of national newspapers/publications.

      We can’t please everyone every time, but we will keep trying.

      Regards,

      The Clime Team.

  19. Leo says:

    What is needed is an objective analysis of all the potential factors that are most likely to impact on the Australian economy with out ideological context.
    We know that an economy flourishes when people spend. They can only spend when they have disposal income. So can anyone tell us how a conservative government fixated in reducing income to the labor force is expecting consumer demand to increase and solve the profit down turn to the business sector? What economic theory supports such an ideological fixation? and where is the proof that wage reduction benefits the economy of a nation?

  20. Graeme says:

    What is frequently overlooked is the quality of our political representatives….. woeful (most of them shouldn’t be fed from the public purse). Their only interest is not losing their seat at the next election !!
    How many have developed deep understanding of one or more areas of governmental activity rather than waiting to be told what to do by the party whips?
    We have had a Prime Minister who used three word slogans to “describe” proposed action rather than communicate details etc and for heavens sake grant a knighthood to a Royal Person. Are we as a nation only interested in entitlements -either tax cuts or being excused from paying due taxes because of favourable legislation for our particular groups.
    Intellectual mediocrity and “ME ME” will ensure that I in my late seventies am most unlikely to experience ever again a competent and effective federal government in economic and/or foreign matters. [could it be that we are drifting, without public discussion, into a quasi poor quality “presidential” system/].

Register for our weekly investing report

Weekly insights, research & market commentary.

* Required fields

View our privacy policy

The information provided on this webpage and the rest of clime.com.au is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein. Please consider our Information Memorandum, Product Disclosure Statement and Financial Services Guide before investing in one of our products. Past performance is no guarantee of future returns.
  • Copyright © 2018 Clime Investment Management Limited