Episode 39

Current Australian Share Market

Welcome to Finance and Fury

Shares are at almost the same price as 2 years ago in Australia – What is happening?

  1. Mid Dec 2016 – 5,580 and last week the 3rd of December – 5,667
  2. 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

  1. When talking about shares there are monoliths 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?

  1. Looking back through history there are indicators, attached are graphs to help communicate this.
  2. Since 1900 the average return of 13.21% p.a., this is a very long-term average and includes dividends (the 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+)
  3. Past 12 months: -5.1% – Pretty small decline, so is the market likely to have another negative year?
  4. Back to back negative returns have happened 5 times throughout the last 118 years, detailed below:
    • 1915-1916: -1.9% and -1.7% (-3.6% cumulative) – Gain of 427% before (13 positive years)
    • 1929-1930: -3.6% and -28.1% (-30.7% cumulative) – Gain of 517% before (12 positive years)
    • 1951-1952: -3.3% and -11.8% (-14.7% cumulative) – Gain of 285% before (9 positive years)
    • 1973-1974: -23.3% and -26.9% (-44% cumulative) – Gain of 441% before (10 positive, 2 negative years)
    • 1981-1982: -12.9% and -13.9% (-25% cumulative) – Gain of 584% before (6 positive years)
  5. From 2009 to 2017 – 246% gain, including this year back down to 234%
  6. 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?

  1. Fundamentals – GDP
    • GDP growth is low – 2.8% this the last measurement
    • 100% to GDP – Back to 2008 levels
    • Our economy isn’t going so well comparatively, this is not a good sign
    • High Corp tax rates and low productivity, this is a sign of poor performance
  2. P/E – Market price today of 5720. This leaves a PE of 15.04 which is the long-term average
    • Indicates that the markets are fairly priced
    • PE drops around – 2 metrics P & E
    • Market crashes – Prices go down
    • Earnings reductions, we haven’t had reductions on a massive scale. Currently a bit below long-term average.
  3. Dividend yields are currently sitting at 4.8%, this is fairly stable
    • Back below longer-term averages of 4.4%
    • Shares are technically cheap based on income yields

 Why is it declining then?

  1. Worries and lack of confidence
    • Political uncertainty, we have an election coming soon
  2. Media stories – constant news cycles
    • The issues will be confidence in the market
  3. 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, gives the market confidence as he lowers taxes, cuts regulations and makes it easier for business
    • Riots (more protests) – The yellow vests, thousands of protesters all through France, Brussels, and the Netherlands

Where it might be heading

  1. Prices – While fundamentals look okay, the market isn’t rational
    • Emotions and fear – They can be rational (running from the guy with the knife), but loss aversion leads to irrational behaviour in the market
  2. Currently – 9 periods EMA is below the 21 periods EMA, then you likely see the market go down further
    • Shares not quite oversold either

  1. 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 over time.
  2. Self-fulfilling prophecy – not the only one who can look at a chart to see this
  3. Massive market crash predicted – Mathematicians claim unprecedented global disaster coming soon
    • Using analysis
    • More likely to happen that they are saying this
    • But the timeframes are 10+ years so who knows

Summary

  1. Nobody can time the market or know when a crash will occur
  2. Financials have dropped in prices a lot, from the royal commission and payouts
    • Seem to be undervalued but updates may prove they will lose a lot of future profits
      • Earnings have been declining
  3. General advice: 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 Returns

https://www.gurufocus.com/global-market-valuation.php?country=AUS

Mathematicians claim ‘unprecedented’ global disaster is just years away

https://www.news.com.au/finance/markets/world-markets/mathematicians-claim-unprecedented-global-disaster-is-just-years-away/news-story/5351f779ce0cce6a48776e86fc15f7f0

Australian Sharemarket – 118 Years of Historical Returns

https://www.marketindex.com.au/sites/default/files/statistics/historical-returns-infographic-2017.pdf

The Australian Economy and Financial Markets

https://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf?v=2018-12-05-14-09-41

 

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