Investors left with sore heads now party is over and market loses gains
That is what happened last week when US Federal Reserve chairman Ben Bernanke said he would have to start "tapering" the massive money printing that has been under way in the US to help economic growth.
Sharemarkets around the world fell as investors pulled out, spooked about what the easing of the cash injection into the US economy would mean for long-term growth in America and globally, as well as asset prices in the short term.
The ASX200 has given up almost all of the gains it has made since the start of the year.
The market, which was trading at about 5200 points last month, closed on Tuesday at 4656 points. All of this year's much-vaunted gains have been erased.
Not only are shares being hammered. The yield on 10-year Australian government bonds is at more than 4 per cent, higher than it has been for more than a year. Bond yields have moved higher around the world. When bond prices fall, yields rise, meaning investors are selling out of bonds.
Even the ultimate "safe haven", gold, has lost its lustre.
Adding to investor fears is China's central bank signalling that it would make credit harder to obtain in an effort to clean-up bank lending.
Matthew Sherwood, head of investment markets research at Perpetual Investments, said Chinese economic growth could be on its way from about 7.5 per cent now to closer to 6 per cent.
The chief executive of Lincoln Indicators, Elio D'Amato, said: "In Australia, we have copped it in the neck. Our sharemarket has fallen loads more than other sharemarkets. You cannot even get a decent rate on a term deposit."
Fortunately, though, for investors, the fall in the value of the dollar will help Australian-listed exporters as they earn more for their exports, he said.
That will help those larger companies that export, such as Brambles, CSL, ResMed and Ramsay Healthcare. And then there are the good dividend yields available on Australian-listed companies whose dividends have high levels of franking.
"It continues to be a good environment for the banks," Mr D'Amato said. With the recent declines in share prices, shares in big banks will soon be able to be bought on fully franked dividend yields of 10 per cent, he said.
Jonathan Pain, author of investment newsletter The Pain Report, said the political uncertainty is not helping Australian markets.
He is expecting the sharemarket to remain volatile going into the federal election in September. Longer term, he is positive about the US economy and economic growth in China, Japan and India. "The time to be mega-bearish was in 2006 and 2007, not in 2013," he said.
Frequently Asked Questions about this Article…
When US Federal Reserve chairman Ben Bernanke said the Fed might ‘taper’ its large-scale money printing, investors pulled money out of risky assets. That spooked markets worldwide — sharemarkets fell as traders priced in less easy money and the potential impact on long-term growth and asset prices.
The ASX200 gave up almost all the gains it had made earlier in the year — it traded around 5,200 points last month but closed at 4,656 on Tuesday. For everyday investors this means recent unrealised gains may have been erased and volatility has increased, so it’s a reminder to review risk tolerance and long‑term plans.
Bond yields have moved higher because investors are selling bonds (bond prices fall when yields rise). The 10‑year Australian government bond yield is now above 4%, a level not seen for over a year. Rising yields can reduce the value of existing bonds and increase borrowing costs, which affects both fixed‑income and equity markets.
According to the article, gold has ‘lost its lustre’ amid the recent sell‑off. While gold is traditionally seen as a safe haven, it didn’t hold up in this episode, so investors should be cautious about assuming any single asset will protect a portfolio in every market shock.
China’s central bank signalled it would make credit harder to obtain to clean up bank lending. That can slow China’s growth — Perpetual’s Matthew Sherwood said growth could move from about 7.5% to closer to 6%. Slower Chinese growth can weigh on global commodity demand and market sentiment, including in Australia.
Yes — the article notes a weaker Australian dollar will help listed exporters because they earn more for their exports in local currency. Larger exporters such as Brambles, CSL, ResMed and Ramsay Healthcare may benefit from the currency move, which can support their revenue and profits.
The article quotes Lincoln Indicators’ CEO saying it continues to be a good environment for the banks. With recent price falls, bank shares could soon be bought on fully franked dividend yields of around 10%. It also highlights attractive dividend yields on Australian companies with high levels of franking credits.
Jonathan Pain expects the sharemarket to remain volatile going into the federal election in September, so short‑term swings are likely. Longer term he remains positive on the US and growth in China, Japan and India, suggesting this episode isn’t a signal to become 'mega‑bearish' for the long term.
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