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What’s going on with the markets? A month of red

October 30, 2018

John Carran

Written by John Carran

Senior Economist at Kiwi Wealth
John's responsibilities include monitoring economies and markets to identify both investment opportunities and risks across asset classes, regions, sectors and industries.

Dip in your balance? Senior Economist John Carran’s thoughts on the recent downturn.

The economy’s doing OK, so what’s going on?

If you’ve been reading the news, you’ll know share markets in New Zealand and around the world have been sliding recently. October will probably end as one of the worst months for shares since the 2008 global financial crisis (GFC).

But, in many ways, the global economy is doing well. So, if there’s no crisis, what’s going on?

Worries about the future

To a large degree, investors are not too worried about what’s happening right now – they’re concerned about the future.

Share markets have experienced a good run over the past 10 years. This has been for a good reason; company earnings have generally grown strongly.

But after an extended period of good performance, investors are starting to notice approaching headwinds.

Costs are rising

In the recent financial reporting round, many large companies indicated that their costs are likely to rise as wages and the cost of materials rise.

Tariffs implemented as part of US President Donald Trump’s crusade against China’s trade practices may also raise company costs at the margin. Therefore, although recent earnings growth has been fantastic, growth may fade somewhat in the near-term.

Clouds are on the horizon

In addition, investors are concerned about several other risks to the global economy.

The US-China trade war, the Italian government’s free-spending ways - which threatens another round of Eurozone troubles - and the prospect of further US Federal Reserve interest rate rises could all potentially dampen economic growth and company financial prospects.

But there is little chance of a second global financial crisis

In my view, at present, there seems to be little chance of a global financial crisis mark II.

The global economy is less vulnerable than it was in 2008. The financial positions of banks are sound, there are no flashing red lights in credit markets, share investors are not over-excited, company earnings are expanding strongly, economies are growing - but not running red hot - and inflation remains relatively subdued.

The environment is still supportive in many ways

No one can predict where markets will head in the short-term.

It’s possible that investor sentiment will continue to sour for a while yet. It’s also possible that shares may rebound.

In my view, it’s most likely we’re experiencing a shake-out of previously over-optimistic investments, which may stabilise soon. This is based on the reasonable state of the global economy, still supportive central banks, and sound financial positions of most companies listed on share markets.

Dip  in your balance? It’s in the context of strong past returns

If you are in a KiwiSaver investment fund with exposure to shares you will likely see a significant decline in your balance for the month of October.

This is in the context of very strong returns over the past two years.

For instance, the return on the Kiwi Wealth KiwiSaver Scheme Growth Investment Fund after fees and taxes was 12.8% in the 12 months to end of September and has averaged 10.6% after fees and taxes over the past five years.

Large ups and downs are normal for share markets

The current market swings are another reminder this year that shares can go through periods of significant decline.

In fact, falls in share markets of at least 10% are quite frequent, and even larger falls can happen every several years. After declining, share prices can sometimes take many months, and occasionally more than a year, to return to previous levels.

However, shares have always eventually rebounded in the past. The occasional large dip in shares is why they have experienced superior returns compared to lower risk investments over longer periods of time.

It can be uncomfortable seeing your KiwiSaver balance go down. If you feel that you are not willing or able to tolerate these periods, then investing in less variable investments may be a better fit for your savings goals. Talking to an Authorised Financial Adviser may help you with your decision.

For more information on the market drops, read the below.

  1. The market has crashed. Here's what NOT to do
  2. Surviving a bear attack. What to do with the markets bite back

The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions.

A Disclosure Statement for each of our Authorised Financial Advisers is available on request and free of charge.

Past performance is no indicator of future performance. The value of your investment (including returns) can decrease as well as increase. No one, including Kiwi Wealth Investments Limited Partnership or Kiwi Wealth Limited guarantees the return of capital or income from any of our investment funds.  Risk management strategies cannot eliminate investment risk.

Tags: Investing, KiwiSaver, Economy, Kiwi Wealth, Investment Basics

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