Following its peak of 5025 on 15 April, the ASX 200 dropped approximately 14% to finish on 4302, a return for the year of 8.8%. Incidentally, the ASX 200 traded at this same level in August last year, giving an indication of the strength of the rally in the first half of the year and the lack of direction since. Given the correction and subsequent volatility, it is worth looking behind the headline numbers at the drivers of global markets.
Europe
The ability of some European countries such as Greece and Portugal to repay debt began to dominate global market sentiment in late April. In response, a rescue package of €750 billion was announced by the 16 member nations of the Euro zone and the International Monetary Fund in mid-May to provide support for these nations and stability to the region’s financial markets. Despite their relatively small contributions to Euro zone GDP (Greece and Portugal make up around 2.6% and 1.8% of Euro zone GDP respectively), the reaction of global markets to the plight of these countries, or the fears that some European banks may collapse, indicate investors are still very cautious about the global recovery. The Global Financial Crisis (GFC) is still fresh in memory.
China
China’s economy produced some astounding numbers in May with its property market advancing 12.4% and exports jumping a massive 48%. Although such growth rates seem positive, fears around the sustainability of this growth and measures of the central authorities to tighten monetary policy in an attempt to restrain growth have added to uncertainty. Chinese stocks have fallen 27% throughout the year as a result of fears that policymakers’ actions to slow the economy were starting to take effect.
US
Economic data coming out of the US has been largely positive but has been overshadowed by events in Europe and China. With the uncertainty surrounding Europe, there has been a ‘flight to quality’ with US Treasuries gaining and the US dollar advancing against many currencies as investors looked for safe havens.
Australia
The Reserve Bank of Australia (RBA) has indicated that although the international environment has become more uncertain over the last few months, they believe the longer term outlook for the Australian economy remains positive. In addition, the Henry tax review was announced on 2 May and, despite having potentially positive implications for superannuation, all of the debate has been around the Resource Super Profits Tax (RSPT). This announcement came at a time when global sentiment had already begun deteriorating as a result of the situation in Europe and concern about the sustainability of Chinese growth. How much the Australian equity market and the Australian dollar has declined as a result of the announcement is hard to quantify, but it can be assumed that these factors have not helped sentiment. Interestingly, though, the Materials and Energy sectors, which contain companies such as BHP and RIO, were among the best performing sectors in the ASX 200 in May.
Outlook
Economic news is likely to continue to dominate sentiment until investors are comfortable that the global recovery is on track. While equity markets may suffer periods of volatility, it is important not to lose sight that superannuation is a long-term investment (see Superannuation - don’t lose sight of the big picture). In light of this volatility and individuals’ investment preferences, most superannuation funds offer a variety of investment options that diversify the risk and returns across multiple asset classes. However, the right choice of investment option will depend on your individual circumstances and risk profile.
