Subscribe to get our latest investment news and insights straight to your inbox.

[recaptcha]

Are markets due for a major correction?

The Australian sharemarket’s long been tied to the fortunes of its bigger US equivalent and the last quarter of 2018 was a fairly characteristic example.

You won’t need reminding that in the last quarter of the year our market shed 9 per cent of its value, according to the ASX200 index of our top 200 stocks, starting the quarter at an index value of 6207.60 and finishing at 5646.40.

What was particularly painful for chart fans was that in the September quarter our market very nearly cracked the record level it had enjoyed pre-GFC in July of 2007, at 6263.3, only to sag back through the 6000 mark during the traditionally nervous month of October 2018.

We’re still below our July 2007 level but that’s most of the bad news out of the way.

It turns out that the US market was the main driver of volatility in our market, adding to the malaise created by our banking sector’s painful and long drawn out journey through the Royal Commission.

Specifically, the US tech giants usually known as FAANG (Facebook, Apple, Amazon, Netflix and Google) led the slide, with their NASDAQ index dropping by 17.5 per cent during the quarter. With a 10 per cent fall in a market being classified as a correction, that’s a significant reverse.

Some of that has to have come from a reaction against the extremely high valuations that investors have been putting on those stocks, letting FOMO (fear of missing out) overcome more level headed analysis.

Facebook shares were the main victim because of the added burden of bad publicity. Founder Mark Zuckerberg’s pale face seemed to be in every newspaper as he fought off allegations of all kinds of intrusions into users’ lives, not to mention allowing Russian intervention in the 2016 US Presidential Election. Its shares almost halved in the second half of the year from just under the $US220 level to below $US140, with no obvious signs of recovery by year’s end.

In Australia, it was the Big Banks that were responsible for most of the negative sentiment in our market. Given that financial stocks represent a whopping 30.4 per cent weighting in the entire universe of listed stocks on the ASX, and that the financials sector shed an aggregate valuation of 7.5 per cent just in the last quarter of the year, there was never going to be a great deal of good news to share around.

The sharemarket is not so much a scorecard as a predictor of future earnings, and the drip, drip, drip of negative stories about the sector from the Royal Commission sowed the seeds of a great deal of pessimism about future earnings. Bear in mind that the three industry subgroups in the financial sector, being banking, asset management and insurance, were exactly the worst offenders under the Commission microscope.

The other manifest drag in the last quarter was the Energy sector, which was slugged by a drop in the global oil price. It only has a modest weighting of 5.8 per cent in the ASX but its stock valuations in Australia dropped by 21 per cent in the final quarter of the year.

The US benchmark crude, West Texas Intermediate, closed the year down 25 per cent. Brent crude, which is more suitable for use as diesel, fell by 20 per cent over the year, with most of the falls in both cases occurring after October thanks to nervousness about future global demand.

Some pundits are predicting the worst is over for the global oil price but the scepticism about Australia’s financial stocks will last at least until the Royal Commission report is handed to the Governor-General on or before February 1.

 

By Andrew Main

This article is the opinion of the author and is not financial advice. Speak to your financial adviser or broker for more information. I’m sure they’ll be happy to help you. Don’t forget to always read the Product Disclosure Statement (PDS) for the active ETF you are invested in. To find out more and to find the PDS please visit einvest.com.au