Jan 15, 2016

Australian Investment markets are currently experiencing higher than normal levels of volatility but we are by no means not alone in this with Global Investment markets also following the same trend. All markets are currently taking their lead from China where a number of political and economic factors are behind this volatility and can be of concern to investors with a short term investment outlook.

As we have discussed with you previously, short term market volatility is to be expected. Our portfolios are extremely well diversified across all asset classes including shares, property, bonds and cash as well as diversified globally. I see no reason for long term investors to alter their strategies as a result of any short term volatility.

The latest Chinese market volatility has been triggered by a number of factors:

  1. The Circuit Breaker System - Implemented last year this is triggered if the share market falls 5% then trading closed for 15 minutes. If the market, then falls a further 2% trading remains closed for the rest of the day. This is supposed to give investors time to stop and think and avoid irrational behaviour but Instead the system has created further volatility.
  2. Gross Domestic Product (GDP) - The market continues to fear the Chinese economy slowing. There has always been an expectation that GDP will slow towards 5% as maintaining the current 7%-8% growth base is near impossible.
  3. Currency Valuation - The Chinese Central Bank has continued to allow their currency the RMB to devalue very slowly and only insignificantly relative to the major currencies, yet the market has interpreted this as a sign of domestic economic weakness.

As China’s economy evolves we will continue to see volatility in its stock market. This volatility tends to blur the underlying fundamentals and valuations of the economy. However, the Chinese economy is the second biggest in the world, and should enjoy GDP growth of 4-5% over the medium to long term.

As always if you have any questions, do not hesitate to contact us.