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Shares are at almost the same price as 2 years ago in Australia – What is happening?
Mid Dec 2016 – 5,580, Last week (3rd) – 5,667 Today – is it a great time to buy some shares or a warning sign of things to come? Break down the health of the market, some reasons for the decline, and what the future may have in store To start – clarify some things When talking about Shares – Monolith of the market – ASX 300, but there are: Financials make up a large chunk (35% approx.) - These have been declining XXJ and XFJ = -11% over that time period = -3.6% decline in ASX Telecommunications (TLS) – Much smaller percentage of the market XTJ = -37% over that time period Volatility – Shows the average movements in price from their average over a period of time Higher levels of volatility can show that markets will rebound Volatility is higher when markets have declined – Markets go down faster than they go up Good time to buy? Looking back through history – graphs to help communicate this Since 1900 – Average return of 13.21% p.a. – Very long term average – Includes Divs – Accumulation index 22 (19%) negative years – 12 years (-10-0%), 6 years (-20-10%), 3 years (-30-20%), 1 year (-40%) - GFC 96 (81%) positive years – 19 years (0-10%), 48 years (10-20%), 17 years (20-30%), 3 years (30-40%), 7 years (40-50%), 1 year (50-60%), 2 years (60+) Past 12 months - -5.1% - Pretty small decline, so is the market likely to have another negative year? Back to back negative returns – happened 5 times throughout the last 118 years 1915-1916 - -1.9%, -1.7% (-3.6% cumulative) – Gain of 427% before (13 positive years) 1929-1930 – -3.6%, -28.1% (-30.7% cumulative) – Gain of 517% before (12 positive years) 1951-1952 - -3.3%, -11.8% (-14.7% cumulative) – Gain of 285% before (9 positive years) 1973-1974 - -23.3%, -26.9% (-44% cumulative) – Gain of 441% before (10 positive, 2 negative years) 1981-1982 - -12.9%, -13.9% (-25% cumulative) – Gain of 584% before (6 positive years) From 2009 to 2017 – 246% gain, including this year back to 234% From 2012 to 2017 – 193% gain, (-11.4% in 2011) – Historically speaking we shouldn’t get a negative return 2 years in a row based around the trigger in gains What is the health of the market? Fundamentals - GDP GDP growth is low – 2.8% this last measurement 100% to GDP – Back to 2008 levels Our economy isn’t going so well comparatively High Corp tax rates and low productivity – a sign of poor performance P/E - Market price today – 5720 – Leaves a PE of 15.04 = long-term average Indicates that the markets are fairly priced PE drops around – 2 metrics P & E Market crashes – Prices go down Earnings reductions – haven’t had on a massive scale – Bit below LT average Dividend yields – currently sitting at 4.8% - fairly stable Back below longer-term averages – 4.4% Technically cheap – based on income yields Why is it declining then? Worries and lack of confidence Political uncertainty – Election coming soon Media stories – constant news cycles The issues will be – Confidence! World economy – We follow America in shocks Sadly not on the way up over the past 2 years. We haven’t had the increase – so will we see a decrease? Trump – Give the market confidence – Lower taxes, cutting regulations and making it easier for business Riots (more protests) – Yellow vests – All through France, Brussels, Netherlands Where it might be heading Prices – While fundamentals look okay, the market isn’t rational Emotions and fear – Can be rational (running from the guy with the knife), but loss aversion leads to irrational behaviour Currently - 9 periods EMA is below the 21 periods EMA then you likely see the market go down further Shares not quite oversold either The market looks to be bottoming out soon – But doesn’t seem to be there just yet However – Still a good time to buy for the long term (10+ years) – Break it up Self-fulfilling prophecy – not the only one who can look at a chart to see this Massive market crash predicted – Mathematicians claim unprecedented global disaster Using analysis More likely to happen that they are saying this But the timeframes are 10+ years so who knows Summary Nobody can time the market or know when a crash will occur Financials have dropped in prices a lot – off royal commission and payouts Seem to be undervalued but updates may prove they will lose a lot of future profits Earnings have been declining Get active funds that work outside of top 20 – These show better long term returns Mid cap funds have average annualised returns of about 13-17% over 10 years, ASX (inc div) – 8% References: Australia Stock Market Valuations and Expected Future Returnshttps://www.gurufocus.com/global-market-valuation.php?country=AUS
Mathematicians claim ‘unprecedented’ global disaster is just years away Australian Sharemarket - 118 Years of Historical Returns The Australian Economy and Financial Marketshttps://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf?v=2018-12-05-14-09-41
