Sharp downturn a timely reminder of sharemarket's volatility

Within a relatively short time, the crisis in the Ukraine and a slowdown in China have caused previously buoyant world sharemarkets to turn down. This downturn is yet another example of the potential volatility of sharemarkets and the need to take care that risk profiles are consistent with one's ability and tolerance to sit out downturns.

Australian investors have seen the share price appreciation of this calendar year disappear and there is a distinct possibility that this year's first-quarter returns will be negative. Overall last calendar year, share investors received returns, including dividends, as high as 20 per cent. 

Unless the situation changes markedly with Russia negotiating an acceptable solution to its annexation of Crimea, the political uncertainty is likely to continue for some time. Western sanctions against Russia will, as in Iran, weaken its economy. But as important as oil and gas exports are to Russia's economy, there's the possibility of disruptions to Russian gas supplies to Europe.

The only hope is that common sense will prevail and a solution can be negotiated. This will inevitably involve considerable financial support from the West to replace the funding promised by Russia to the previous regime.

As serious as is the Ukraine problem, the Australian sharemarket has been more focused on declining growth in China, a restructuring of its steel industry and falling iron ore prices. A worsening Ukrainian situation would have its biggest impact on Europe, whereas both the Australian and, to a lesser extent, the US economies would be more affected by problems in China.

Neither of Australia's largest iron ore exporters appear concerned about the medium and long-run future of iron ore exports. Indeed, a lower price may even help them in the short term because of its more serious impact on higher cost and more heavily geared new producers.

So far, the Australian dollar has held its value despite the concern about China's prospects. If this support for our dollar is any guide, the foreign exchange market's assessment is that China's problems are only temporary.

Given the extent of Australia's reliance on China to buy our commodity exports, a serious downturn in its growth would have to drive the value of the Australian dollar down. Foreign exchange markets are particularly difficult to predict, but so far they are less pessimistic about China than is the sharemarket.

With our sharemarket still trading at near post-GFC highs, there's still time for investors to restructure their portfolios if they wish to be out of a market plagued by uncertainty. Certainly, now is not the time to be 
over-exposed to the sharemarket investors aren't able to afford the risk of further adverse news from overseas.

 

Daryl Dixon

 

 
Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

 

 

 

 

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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