Analysts see increased volatility as US impasse continues, writes Glenda Kwek.
Hang tight and look for buying opportunities. That's the advice some analysts are giving their clients despite growing nervousness in financial markets as political gridlock in the US threatens to spill over into a debt ceiling battle.
Global markets, including in the Asian region, slipped into the red on Friday as financial leaders warned that a US default on its debt obligations could wreak havoc on the US and global economies.
The benchmark S&P/ASX200 shed 26.9 points to close at 5208 points on Friday, recording a 1.9 per cent loss for the week. The broader All Ordinaries lost 26.1 points, closing at 5205.9.
Analysts said there would be a period of volatility in financial markets as the US government shutdown dragged on and the political battle turned towards Congress' raising of the country's debt limit.
Even so, they expected any tussle over the debt ceiling to eventually be resolved, but to potentially leave the US economy weakened.
"You will see a growth shock because there will be fiscal austerity resulting from this any way we cut this, and so slower growth is usually consistent with lower bond yields," said Credit Suisse equity analyst Damien Boey, who advised investors to look at bonds or bond proxies.
Bond proxies such as consumer staple companies, utilities, telcos and some REITs would be attractive during this period of volatility, Mr Boey said, adding that gold and local larger-cap resource stocks could also prove to be good investment options.
"Larger-cap resources stocks are trading at a considerable discount to earnings as it stands, so even if commodity prices fall, they can absorb that. More than that, they have room to be re-rated from a valuation perspective," Mr Boey said.
RBS senior trader Luke McElwaine said while investors had to remain cautious during this period of uncertainty, there were buying opportunities in the Australian share market. He noted that the local market has remained fairly robust despite the growing jitters around the world.
"We tend to see this as an opportunity rather than a sell-out. There's probably a decent rally on the back of this," Mr McElwaine said.
"There's some pretty good fully franked dividends on offer in November for ANZ, NAB and Westpac. So our view is that with improving business confidence, it's probably not a bad time to be buying some of the good-quality companies, like the BHPs, that have been beaten up over the past 12 to 18 months."
Looking beyond the short-term volatility, expectations remained for the global economy to continue to recover next year after the political tussle was resolved, JBWere executive director Mike Kendall said.
"Europe looks like it is stabilising and [US Federal Reserve chairman Ben] Bernanke's tapering is in response to the US economy strengthening. China looks like its economic momentum is going to be a little bit better than the market was expecting, and that could be more positive for commodity prices than had been previously expected," he said.
Stocks with exposure to the global recovery would have growth potential next year, while a pull-back in high-yield stocks at some stage over the next few weeks might give those in superannuation funds the opportunity to buy into such companies, Mr Kendall said.
"For people who may have more of an aggressive trading edge, some of the resource stocks might open up a bit of value that you can move into. But as always, you've got to pick your targets carefully," he added.
At the same time, while the US dollar had spiked higher during the 2011 debt ceiling stoush, it was expected to continue to soften during this latest battle as the world's economic landscape had changed, the Commonwealth Bank currency strategist Peter Dragicevich said.
"This time round, you don't have the issues that you did have then around Europe, and the global economy is looking better.
"US dollar liquidity in the marketplace - given those banking and sovereign issues aren't there in Europe at this stage - [means that] we do think the US dollar will go the other way and soften and fall," Mr Dragicevich said.
"So we could see the [Australian dollar] continue to drift higher," he added.
The Australian dollar was buying US94.40¢ late on Friday, its highest level since mid-September.
A weakening of the US economy as a result of the political conflict could also lead the Federal Reserve to delay its tapering plans and continue supporting easier monetary policies for a longer period of time, Mr Dragicevich said.
The US Treasury said it could reach its borrowing limit by October 17 and be down to its last $US30 billion.
The Congressional Budget Office expected that the US could start to default on some of its obligations from October 22 to the end of the month if the debt ceiling was not raised. The US also has large debt payments on October 24 and October 31.
"A default would be unprecedented and has the potential to be catastrophic," the US Treasury said. "The negative spillovers could reverberate around the world."