Comments about ‘seasonal weakness’ illustrate a general market perception that the months of September through to December are often bad for financial markets.

At the beginning of July we wrote about Greece’s default concluding it would have a limited impact on Australia as “our fortunes are much, much more closely tied to China’s economy than Europe’s.”

Well, this time it’s mainly about China.

Be alert, even a little alarmed, but don’t panic.

There’s an old saying in financial markets: “the U.S. sneezes and the world catches a cold”. Today, that’s just as true of China as it is of the U.S. … more so for Australia.

The question is, is this just a sneeze, or does China have a cold?

The bad news is, China is facing some real problems. The economy is slowing and that’s not likely to change any time soon.

  • Chinese authorities seriously spooked markets by unexpectedly implementing the biggest devaluation of the Chinese currency in more than two decades in response to weak exports. The move triggered a wave of other Asian currency devaluations, and worldwide sharemarket falls.
  • China’s manufacturing sector has fallen to a 77 month (nearly 6 and a half year) low.
  • The Shanghai Composite Index is continuing to drop despite unprecedented government efforts to control the fall. It is down over 8% so far today after falling 12% last week.
  • China weakness is affecting US and European sentiment, which is driving more weak sentiment in China in a vicious cycle.

This weakness is, of course having a major impact on commodity prices. Oil is below US$40 a barrel for the first time since 2009 and analysts aren’t confident that iron ore’s recent rally above $US50 a tonne (from a low of $44 in July) will be sustained. A few weeks ago Rio Tinto announced an 80 per cent fall in half-year profit, and tomorrow BHP will reveal the impact of falling commodity prices on its bottom line.

To make matters worse, the Australian banks have already fallen 20% from their highs, partially as a result of massive capital raisings in response to new Australian Prudential Regulation Authority capital requirements.

What about the good news?

Chinese monetary authorities have relaxed their grip on credit growth. It hit a 31 month high in July and has increased by 20 per cent over the last three months, so activity may rebound later in the year. Beijing’s ability to pump prime the economy will however be limited by their need to avoid re-inflating property and share market bubbles, and ongoing attempts to crack down on official corruption.

So what was the bit about not panicking?

Our crystal ball is no clearer than anyone else’s but investors should steel themselves for a period of weakness and volatility in share markets around the world, which could easily last several months (if not longer). No-one should be surprised if the Australian market falls back below 5,000.


We’ve been here before, many times. Over the last thirty years we’ve seen the 1987 sharemarket crash, the Asian Financial Crisis, the Tech Crash, the 9/11 terrorist attacks in the USA and Bali, two Gulf Wars, and the Global Financial Crisis.

Despite these financial crises, an investment of $10,000 in 1984 would have been worth $275,000 in 2014. That’s an average return of 11.7% per annum combined with the amazing power of compound interest.

In fact, ­weak markets provide excellent buying opportunities for long-term investors.

What are your thoughts?

Are you worried about the market, or happy to ride out the volatility? Is there anything else you’d like to know about the current sharemarket turmoil?

Join the conversation — leave a comment below and let us know what you’re thoughts are.

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