Market volatility gives some pause for thought

Having ridden the crest of a seemingly endless wave of positive sentiment and upward movement, the Australian Stock Exchange recently showed its first major signs of vulnerability in more than three years.

After breaking through the 5,000-point barrier for the first time on March 20 this year and peaking at 5,364.5 points in May, on June 13 the benchmark S&P-ASX 200 lurched to its lowest single-day fall since September 11 2001, bottoming-out at 4,838.9 points.

The recent sharp volatility in the Australian market has dented the confidence of bullish Western Australian investors and consumers, who had come to believe the state’s resources-led boom had made it immune to market pressures.

So, as the end of the fiscal year approaches and the market hovers around the 5,000-point mark, it may be time to ask whether we are experiencing a correction or a contraction.     

Graeme Yukich, managing director of leading high-end Perth financial advice practice Entrust Private Wealth Management, remains optimistic about the current state of the market, and in particular WA’s prospects.

Mr Yukich established Entrust in September 2002 after a 12-year career with Hartleys, and the business currently has about $500 million in funds under management.

“What we are seeing is the market returning to the levels of three months ago, and the correction has really just knocked the froth off the top of the market,” he told WA Business News.

“The hedge funds entered the market and drove up commodity prices, buying direct parcels of commodities, in particular copper and gold, and then they all tried to exit the market at the same time.”

Interestingly, Mr Yukich believes recent market conditions provide an indication that the nexus between the Australian and US economies has been broken.

Comparisons of recent economic growth rates is evidence, he says, that the state of the WA economy in particular is more entwined with China’s economic fortunes than those of the US, whose economy is experiencing inflation and interest rates pressures.

China, by contrast, is undergoing a period of sustained growth inextricably linked to the WA economy through its unprecedented demand for this state’s natural resources, most notably iron ore.

“China’s growth is assured up to the Beijing Olympics and beyond. Its annual growth is around 9 per cent, and WA’s growth rate was more than 10 per cent last year,” Mr Yukich said.

Australian Bureau of Statistic figures show that WA’s economic growth for the 12 months to March this year, measured by state final demand, was 10.6 per cent.     

Mr Yukich also points to an odd ally, in the continuing problems of skills shortages and capacity constraints in WA, providing an unexpected benefit to the state’s economy in the longer term.

“Simply put, the physical constraints caused by skill shortages will mean that some projects are pushed out into the future, extending the cycle for the completion of current and upcoming projects,” he said.

“This means that the outlook for WA for basically the rest of the decade is very strong. Growth may reduce to around 6 per cent, but that is still very healthy.”  

From a client advice perspective, Mr Yukich advocates a balanced approach, saying that there is no great need to be overly cautious because the fundamentals of the Australian market have not changed and remain strong.  

Senior consultant with Australian Finance Group’s financial planning division, Chris Craggs, also believes the recent market movement was more of a correction than the start of a prolonged down cycle.

Mr Craggs, whose practice manages about $34 million, told WA Business News he thought the market was slightly overvalued.

“What we have seen is a correction in the market,” he said.

“Typical of all markets when they are in a boom period, people begin to think that the good times will go on forever, and greed drives the market up to an unsustainable level.”     

Mr Craggs believes the market is currently a little more stable, but that there remains some uncertainty.

He points to negative indicators in the US economy, and the prospect of China pulling back on other development to focus on the Beijing Olympics, as variables that may affect the local market.

“Because of the market uncertainty I would take a cautious approach with clients and look at dollar-cost averaging as a strategy,” Mr Craggs said.

With dollar-cost averaging, money is invested into the market on a regular on-going basis, instead of a one-off lump sum amount.

It can be used in times of fluctuating markets to smooth variations in investment returns.

If the market and stocks (or other securities) that a client is investing in are down, then the regular amount the client invests will buy more of their investment, and the client’s portfolio will benefit if, and when, the share price improves.

Concentric Private Wealth Management senior private adviser Mark Edman is another who believes the market has just metaphorically sneezed, not caught a cold.

He has been in the financial advice sector for 12 years and his business has about $70 million in funds under management.

“I hesitate to use the term correction, as it suggests that something is actually wrong, but that is essentially what I believe the market has gone through,” he told WA Business News.

“The market was overheated and we have seen a slide-back to fair value.”

Mr Edman says clients must carefully manage their expectations after a sustained period of high returns in portfolios.

In the belief that the market has been overheated for some time, Mr Edman’s approach has been to look for value opportunities to buy into the market at fair prices.

He also suggests a staggered approach to investing, rather than dollar-cost averaging, preferring to hold funds in cash or other defensive assets until identifying the right time and opportunity to enter the market.