Australian Share bear market – implications for investors…

February 18, 2016

News that the Australian share market as measured by the ASX 200 index briefly slipped into bear market territory last week as defined by a 20% decline from the most recent high – which in this case was April last year – has generated much coverage and interest and understandable concern.

Out of the 17 bear markets in Australian shares since 1900, 11 have moved higher over the 12 months following a 20% decline, suggesting that based on history there is a 65% probability that shares will move higher over the year ahead.

Factors that play a role in determining whether a much deeper bear market may occur are: whether Australia or the US have a recession, whether there is a sharp fall in earnings and albeit, with less reliability, valuations. In regards to these:

  • Our view remains that the US is unlikely to experience a recession given the lack of prior excesses (in terms of cyclical spending, debt growth or inflation) and the absence of significant monetary tightening.
  • In Australia, we continue to see growth tracking along at around 2.5% pa, with recent economic indicators broadly consistent with this.
  • On the earnings front, resources earnings have already crashed 80% or so and at 10% of the overall market their ability to do further damage is limited. Meanwhile, the profit reporting season underway suggests profit growth in the rest of the market is meandering along at around 5%.
  • Finally, the cyclically adjusted PE + inflation valuation measure at 21 when the current bear market started was at the low end of the range for the start of past bear markets and at 18 now is close to as low as it ever gets.

These considerations provide some hope that Australian shares will be higher rather than lower in a year’s time. The main risk is that gloom and doom about the global outlook become self-fulfilling, dragging shares lower. The historical experience suggests that there is a limit to this though and global central banks seem to be awakening to the risks and so are moving in the direction of seeking to stabilise financial conditions.

The following article by Shane Oliver, Chief Economist at AMP, takes a look at what drives mild versus deep bear markets as well as an overview of what to expect in the coming year.

Please click here to read the full article.

As always please feel free to contact us if you would like to discuss this or any other matter in greater detail.