Making sense of market moves

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August and September 2015 heralded a return of volatility in financial markets, with the MSCI developed market share indexes declining by more than 9 per cent in the week to 24 August.

The start of the new year failed to herald any relief from market volatility, with the MSCI index falling 8.4 per cent from the 2016 market open to 15 January. The losses pared back a lot of the gain from global share markets over the prior 12 months, at the same time returning some pockets of value in shares. It remains, however, a volatile market and investors should continue to seek professional advice and remember
to stay true to their long term financial plans. 

During times of higher market volatility it is normal to feel a bit confused or panicked, and to wonder what is really happening behind the scenes and the headline figures that tell us how the index performed today. Markets in the short term can be irrational and driven by sentiment – whether it be fear, exuberance or anything in between. However, over longer periods, professional investors and broader sentiment closely track the strength or weakness of important data known as macroeconomic indicators. The release of this data is heavily analysed by economists and fund managers in an attempt to forecast national economic strength and with it ultimately the future direction of markets and asset prices.

To many people this data can seemingly mean very little; it might occasionally flash across news screens but it doesn’t change our daily lives. Or does it? Below is some common market terminology which may help unravel some of the complexity. However, for many people, speaking to your financial adviser can be the best way of putting into context the real meaning of market moves for you and the overall impact, if any, on your long term savings goals.

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Do you know your market terminology

The price to earnings (P/E) ratio: is a metric used to compare the current value of a company, measuring the current share price relative to the earnings of the company on a per-share basis. This metric is often used when analysing whether a company’s share price is fair, expensive or cheap as when one buys a share in a company they are literally buying part ownership over the earnings of the company. This metric directly makes this comparison. Most often it is calculated based on the last four quarters of results (known as trailing earnings), but forward forecasts can be made based on analysts’ estimates of earnings for coming quarters.

Due to market upheaval in the last six months, the Australian share markets (ASX 300 index) trailing price-to-earnings ratio fell from 17.4, and as of January 2016 was at 17.2, marginally above the long run average of 16.2. Meanwhile the forward price-earnings multiple fell from 16.1 to 14.8 in July last year and as of 20 January 2016 had gained some ground to 15.7. The long run average remains unchanged.
Source: Thomson Reuters Datastream

Global earnings growth forecast: is another series that is used by investors to measure whether share market valuations are appropriate. It compiles a consensus view of a number of analysts, covering global shares listed on either or both local country indices and the MSCI All-Country World Index. It then calculates the average or median estimate between those polled. It is commonly calculated by global brokerages or data analytics organisations.

Currently, the consensus view sees global corporate earnings growth (for the MSCI world index) sitting at about 6 per cent for the 2016 calendar year.
Source: Thomson Reuters Datastream

Emerging market economies: are those economies with relatively low to middle per capita income. They make up approximately 80 per cent of the global population, and by GDP represent more than half of the world’s economy on purchasing power parity . They are usually considered emerging due to economic developments and reforms which can in turn help open their markets globally. Some may also be in a transitional phase between developing and developed status. Because the risk of investing in an emerging market country can be higher than a developed market, they may be more susceptible to swings in investor sentiment leading to greater degrees of volatility than other markets, as was the case in the 1997 Asian crisis. Some of the largest emerging and developing countries include Brazil, Russia, India and China, known as “BRIC” countries, along with South Korea, Taiwan and South Africa.

“Stimulatory fiscal policy”: is often used when an economy is slowing down and unemployment levels are on the rise, reducing consumer spending and businesses profits. In such circumstances, Governments may cut tax rates in an attempt to provide consumers with more money that they could spend. At the same time, they may directly increase government spending to offset weakness in private spending. By investing in large infrastructure developments or upgrades and or investments in schools, a Government would hope to create jobs and increase household income, and in doing so support consumer confidence and pumping money back into the local economy.

Fiscal policy: refers to the means by which a Government can monitor and influence the overall performance of a country’s economy via adjusting its spending on social welfare measures such as education, healthcare and defence and through attempting to redistribute wealth via tax policies. A Government’s attempt to smooth out economic cycles by increasing taxes or cutting spending when growth is strong and doing the opposite when growth is weak is one common facet of fiscal policy. This element of fiscal activity is based on the theories of British economist John Maynard Keynes, which suggested that governments can influence a country’s activity levels by increasing or decreasing taxes and public spending. The impact of using these two levers together should in theory raise economic activity. An example of poor fiscal policy would include simultaneously increasing tax rates, while cutting government spending at a time when consumer confidence and growth were falling, effectively sending an economy into recession.

Developed market economies: are those countries that are the most developed in terms of their economies but also their capital markets. The FTSE Group, a provider of data, quantifies these by considering their economic size; wealth; quality of markets; depth of markets and breadth of markets. Factors considered include level of income, openness to foreign ownership, ease of capital movements and the efficiency of market institutions. As of September 2014 Dow Jones classified 26 countries as developed markets: Australia; Austria; Belgium; Canada; Denmark; Finland; France; Germany; Hong Kong; Iceland; Ireland; Israel; Italy; Japan; Luxembourg; Netherlands; New Zealand; Norway; Portugal; Singapore; South Korea; Spain; Sweden; Switzerland; United Kingdom and the United States.

Central bank activity: includes the monthly meetings and intra-month speeches given by a country’s central bankers. They are closely followed, both domestically and globally, as they can provide an indication of the future direction of interest rates and current central bank sentiment, which directly impacts both bond and stock markets. Central banks are important as they set very short term interest rates in an economy. The level and outlook for these overnight interest rates drive all other interest rates in the economy.

You may have seen news reports citing “falling Chinese share markets” – but what are the Chinese share markets and who are their investors?

What is the Shanghai Composite Index and who are the ‘average investors?’

The Shanghai Stock Exchange Composite Index was launched on 15 July 1991 and is made up of companies traded at the Shanghai Stock Exchange. Historically, this market has largely been closed to foreign investors, with just a small proportion of the local Chinese population, many of whom are largely uneducated or unsophisticated, investing in this market.

What is the Hang Seng Index?

The Hang Seng is a Hong Kong based stock market index that was launched on 24 November 1969. It consists of 50 companies that represent approximately 60 per cent of the capitalisation of the total Hong Kong Stock Exchange. It is used to record and monitor daily changes of the largest companies listed on the Hong Kong stock market and is the main indicator of the overall performance of the Hong Kong market.

Plan ahead to meet your lifestyle goals

At times like this market movements can be hard to ignore, and all the related terminology overwhelmingly complex. However, seeking professional financial advice can give you clarity. Your financial adviser can help you build a diversified portfolio and establish a long term plan if you haven’t already done so, or adapt your existing plan to ensure it’s appropriate to weather market ups and downs. Having a long term financial plan in place can help you reach your savings and lifestyle goals.

Speak to your financial adviser today for more information.

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