Recent market falls
Share markets fell last week with the Australian market experiencing one of its worst weeks since August 2011 (when people thought the EU would break up). Negative returns in any given period can happen in the share market with this week standing out for its severity. However, we also see historically shares have lost value in approximately 22 weeks out every 52 weeks since 1980. It is not a rare thing to see in the share market. Shares lost money because a rise in Covid-19 (a.k.a. coronavirus) cases outside of China saw investors sell out of shares and look to safer assets such as bonds or gold. This is because efforts to combat the virus will likely see travel, trade and business activity either slow or shut down temporarily. That would see weaker demand for goods and services, so business profits and wages are likelier to struggle in the short term.
Major movers in Global Markets (1 Jan – 28 Feb 2020)
Shares were not the only victims. The Australian dollar also continued to fall, down ~5.3% for the year against our major trading partners. Oil was another victim with an expected weaker economy meaning oil for planes and other transport e.g. trucks will attract less demand. As a result, we have seen oil prices fall substantially, year to date.
Ongoing monitoring and action
Key risk indicators such as volatility and credit spreads have shown mixed results. They are suggestive of business weakness in areas dependent on energy prices for example where some businesses will be facing difficult times.
One measure of risk for Australian equities is volatility. This tracks how much shares move around their average return. It tends to spike higher in periods of market stress such as this past month. Currently it is tracking at around 14.9%. For context we expect Australian shares to track at a higher level of 18.9% per our latest SAA review. This level is also below historic averages of around 16% i.e. you should not be surprised to experience periods like this from time to time.
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