Since the S&P/ASX200 hit an intraday high of 5,996.9 reached on the 3 March 2015, the market has fallen 15.72% or if you include dividends -14.18%. The Australian share market is well and truly in bear market territory. Despite the significant volatility over the last few trading days and the capitulation day reached 24 August – where the market tumbled over 4%, the market was already in decline. Notably the weakness was felt across Banks on the back of a number of equity raisings, weaker commodity and oil prices, a skittish Chinese sharemarket and a generally mixed reporting season especially on muted outlook statements. As of writing the market has bounced (25th August) by some 100 points.
The fall experienced on the 24th August – where the Australian market fell over 4% was wide spread with all sectors declining substantially. As they say “there was nowhere to hide”, as investors dumped stocks. So what happened? A couple of key points that triggered the flight to safety notably:
A real sense of fear and capitulation last Friday night (where the down fell over 500 points) on the basis of;
• China slow down;
The markets have been edgy since China made those changes (devaluation of the Yuan) to its currency ranges a few weeks ago, but markets reacted negatively following the release of the China August flash manufacturing PMI. It fell to 47.1, the lowest reading since the Global Financial Crisis. The falls in the sub-indices were broad based:
• the production index fell to 46.6 from 47.1;
• the new orders index also weakened to 46.3 from 47.2;
• the employment index moderated to 46.0 from 47.2 (the lowest since GFC); and
• the suppliers’ delivery times increased to 49.7 from 49.4.
While the flash series can be quite different from the final, the sharp fall does renew uncertainties about recent activity growth and fed a China growth scare right across markets.
• While the underlying economics in US remain solid – the China slowdown is clearly more worrying. However, investors are now also unsure about US tightening weighing on investor sentiment.
This weak data has continued to weigh on global markets. The Shanghai Composite Index had a tough day down a further 8% during the day, contributing to the negative sentiment towards the Australian sharemarket.
The market is now 15% cheaper. After the sell-off the S&P/ASX200 is now trading on a forward PE of ~14.6x which is only slightly above its 15 year average of 14.2x and down from recent highs of 16.4x. Taking a look at one of the biggest constituents of the index – the Banks, they are now trading on a forward PE of ~12.3x lower than the 15 year average of 12.4x, and down from recent highs of 14.9x. The dividend yield is now on average 6.1% fully franked. Post the equity injections, the Banks financial positions are arguably in a stronger position and at the recent result updates bad and doubtful debts remain contained with no blow-outs.
There are no doubts the sharemarket volatility has increased over the last few months and China remains the swing factor in global prosperity. However, time and time again, market corrections can provide great opportunities to buy outstanding businesses. Even though the current reporting season has been mixed there have been some “solid” results such as AMP, Transurban Group, Sydney Airports, Asciano, QBE Insurance, Sonic Healthcare and SMA Management and Technology to name a few.
Economically, outside of China, growth in the US remains robust. The data had been clouded by severe weather conditions, west coast strikes and slowing down of the energy investment boom during Q1. However, employment growth remains strong and likely to go through 5%. Given the continued improving US economic data, the Fed has been indicating that the commencement of the ‘road to interest normalisation’ could be expected prior to the end of 2015.Following the commencement of quantitative easing, the European economic data has also been improving over recent months. The Japanese economy has been patchy – Q2 GDP contracted 0.4%, representing an annualised –1.4%. However, it’s expected improved data in the second half of the year as a weaker Yen improves corporate earnings. The Australian economy is transitioning and service exports are rising quickly (but not really grabbing the headlines yet), while unemployment remains steady. Despite higher house prices, the RBA still has room for further interest rate cuts. Importantly, the lower AUD is assisting exporting businesses and companies that have exposures to US denominated currency.
Source: JBWere Investment Strategy Group (25 August 2015)