THE Australian sharemarket is being thrown down, then up, as fear and hope fight it out on the global stage. But what does this mean for our economy?
Most likely, not much. Markets plunge and soar, but the economy is doing neither. All this year it's been muddling along, stuck in second gear. And it will probably keep on muddling along in second gear.
You wouldn't guess that from the sharemarket. At one point yesterday, a fortnight of fear and panic had wiped about $240 billion off the value of Australian stocks and knocked trillions of dollars off global wealth. That's a big hit.
But then, sharemarket money is not real, unless you're selling. The benchmark S&P/ASX 200 index hit 6829 in late 2007, sank to barely half that in early 2009, rebounded to just under 5000 last April, then started leaking slowly, until fears over the parlous fiscal state of US and European governments turned leak into flood.
The S&P/ASX 200 index closed at 4603 on July 22, then started sinking. By Monday it dropped to 3986, then yesterday to 3766 before abruptly flying back up to close at 4035. Traders attributed the rebound to heavy buying in their own markets by the Korean and Taiwanese governments.
That's probably not the strongest basis for a rebound in Australia or anywhere else. This play could have many scenes left. Confidence is fragile, and global confidence will stay down until there is firm ground to support it.
Last week's debt deal in the US was essentially a decision by the Republicans to keep the US from defaulting on its debts, but to block any long-term correction to the US government's unsustainable fiscal course while President Barack Obama is in office.
The markets, and ratings agency Standard & Poor's, saw this as a road to ruin. The Republicans set down markers (such as preserving tax loopholes) which would equally prevent a Republican White House from getting the US back on track. The markets were falling fast even before S&P stripped away Uncle Sam's triple-A credit rating.
About time, we Victorians might say. Remember how in the '90s, the ratings agencies demoted Victoria two notches when even under the financial foot-binding of the old Loan Council rules there was no risk of Victorian governments defaulting on debt payments?
Yet last week, the US House of Representatives went to the brink of voting for such a default.
S&P has started to apply the same rules to the US as it applies in rating other governments. It knew this would lead to turmoil on financial markets, but judged it better to pull the plug now than to keep up the pretence that buying US securities is risk-free.
Bill Gross, who runs the world's biggest bond fund, PIMCO, applauded. "S&P demonstrated some spine," he said."They spoke to a dysfunctional political system . . . they finally got it right."
Fiscally, Australia is a sharp contrast to the US. Its net debt is only 6 per cent of GDP and projected to be back in the black next year. That might prove optimistic growth is unlikely to be as strong as Treasury projects. But as former Reserve Bank board member Warwick McKibbin puts it, "surpluses are not the be-all and end-all of policy". If things do go wrong, Australia has one of the few Western governments in a position to respond a second time.
Whether things go wrong for us will depend more on what happens in China than in the US or Europe.
Frequently Asked Questions about this Article…
What’s driving the recent Australian sharemarket volatility and big swings?
The article says global fear and hope are driving volatility: worries about US and European fiscal positions, the US debt deal and S&P’s downgrade, plus short-term moves such as heavy buying by Korean and Taiwanese governments. In a fortnight of panic the market lost about $240 billion in Australian stock value, then partially rebounded, showing how sentiment — not necessarily fundamentals — is moving prices.
Does a plunging sharemarket mean the Australian economy is in trouble?
Not necessarily. The article explains that sharemarket money isn’t ‘real’ unless you sell, and that this year the economy has been ‘muddling along in second gear’ rather than crashing. Market falls can reflect sentiment and global shocks without an immediate, equivalent hit to the domestic economy.
How has the S&P/ASX 200 performed recently and why should investors care?
According to the article, the S&P/ASX 200 hit 6,829 in late 2007, fell to about half in early 2009, rebounded to just under 5,000 last April, then slid — closing 4,603 on July 22, falling to 3,986 and 3,766 before bouncing back to 4,035. Investors watch the S&P/ASX 200 because it reflects listed-company valuations and market sentiment, even if it doesn’t always mirror the real-time health of the broader economy.
What was the effect of the US debt deal and S&P stripping the US triple-A rating?
The article says the US debt deal avoided immediate default but blocked long-term fiscal correction, which markets and ratings agency S&P viewed as risky. S&P’s downgrade signalled that US Treasuries aren’t risk-free, contributing to global market turmoil. Bill Gross of PIMCO praised S&P for taking a tougher stance.
How does Australia’s fiscal position compare to the US, and why does that matter for investors?
The article notes Australia’s net debt is about 6% of GDP and is projected to return to surplus next year, contrasting sharply with the US fiscal position. That stronger starting point means Australia is in a better position to respond if global conditions deteriorate, which is a relevant consideration for investors assessing sovereign and economic risk.
Should everyday investors be worried about ratings agencies like Standard & Poor’s?
Ratings agencies can move markets because their assessments change perceptions of government and credit risk. The article describes S&P applying its usual standards to the US and prompting market turmoil, but also argues that being realistic about sovereign risk can be beneficial. For investors, ratings changes are a signal to reassess risk exposure, not an automatic reason to panic.
Is the recent market rebound likely to be sustainable?
The article expresses caution: the rebound was partly attributed to heavy government buying in Korea and Taiwan, which isn’t a strong foundation for a lasting recovery. It says confidence remains fragile and global sentiment will stay weak until firmer ground is established, so sustainability is uncertain.
How important is China to Australia’s economic outlook compared with the US and Europe?
The article states that whether things go wrong for Australia will depend more on what happens in China than on the US or Europe. For everyday investors, that means monitoring Chinese demand and economic signals is crucial when assessing Australia’s growth prospects and market risk.
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