The financial market instability continued on through to the end of September with all the major markets falling a little further following the issue of our September Newsletter.  But, as happens, some stability has returned to the markets despite their being no significantly different “new” news and the world’s equity markets have bounced back smartly in October from their sharp sell-offs in August and September.

Since October 1st, major stock markets have seen decent sized bounces, for example:  the US Dow had rebounded by 7.9% from its September 30 lowpoint, the UK FTSE by 5%, the Hong Kong index by 11% and our own All Ordinaries by 6.4%. But as the chart (below) shows, the Aussie share market is still a long way off recovering the pre-GFC highs and at the current rate seems likely to be the slowest historical recovery.

Fears of early monetary policy tightening in the US receded, and concerns about China’s rate of growth appear to have eased, at least for now. And in Europe, PMI figures indicate economic activity is robust (chart below, right).  Meanwhile, Greece’s September 20th election delivered a surprisingly solid win for Syriza, leaving the government coalition intact. The prospects for policy implementation have therefore improved with more than 90% of the parliament now in favour of bailout terms though risks remain.

After this recovery, however, quite a few analysts believe equity markets in general are back at fairly expensive levels of valuation, and are again vulnerable to adverse changes in perception about monetary policy settings or global economic growth, and particularly growth in the major emerging markets.

It appears that global equities still have the benefit of moderate growth in the developed economies, ongoing if slower growth in China, and a slower return to less supportive monetary policy than looked likely even a few months ago. But as the August/September turmoil demonstrated, at current expensive valuations there is not much leeway for international equities to be able to absorb the impact of any adverse developments.

At home, the outlook for the economy appears to be improving after an extended period of subpar growth; the Reserve Bank of Australia is expected to hold interest rates steady, though a minority believes an interest rate cut is still possible.  The previously weak Australian dollar has firmed, although in time it is widely tipped to drop back to a level more consistent with export competitiveness.


Sources:  ASX, Morningstar Research, Goldman Sachs Asset Management, Bloomberg.