As I write this, worldwide markets are in the midst of a decent sell-off. The US have erased 2020’s gains in the space of one night! Although evidence suggests that coronavirus is being slowly contained in China, it’s spread to other countries is causing market shockwaves.
In relation to Australia, our sharemarket has shrugged off a worsening economy, our own natural disasters, and a cautious earnings season to continue to move upwards, setting record highs for the ASX. It has taken a “black swan event” – in this case, Coronavirus, to perhaps alter the market mood. Most would agree that our market has become overvalued, and our approach has been to be cautious. Fear is a powerful sentiment, particularly in relation to investment markets. While it might be coronavirus that triggers the start of this correction, it may well be other factors such as the fear of spiraling debt and slowing economic growth that compounds the sell-off.
My view is that this will be a relatively short-term correction. While not understating the severity of coronavirus (and the various economic factors mentioned above), there remains record levels of cash sitting on the sidelines in Australia. Some of this has been waiting for such corrections to find a more suitable entry point into equity markets. Record levels of super contributions continue to be made and will in part find their way into our sharemarket. And last but not least, in many cases, there is a lack of suitable alternatives. The likelihood of long term shareholders selling down their shares to invest in less riskier asset classes seems less likely with prevailing historic low interest rates. During the GFC 10 years ago, panic selling was at least in part due to term deposits providing circa 6% returns being a viable alternative. This is not the case now, and arguably wasn’t a good strategy in any case.
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