In recent times we have seen an increase in share market volatility driven largely by negative sentiment about the state of the global economy.  In September last year we communicated to you about the main causes for this.  In summary and in no particular order of importance they are;

  1. Ongoing concern about the state of the Chinese economy
  2. The US Federal Reserve decision to increase official interest rates
  3. The Syrian conflict and the associated humanitarian crisis now playing out in that region and Europe more broadly

In addition to these challenges there has been significant downward pressure on commodity prices which has obvious negative connotations for Australia and makes dealing with the Federal budget that much harder as our terms of trade (national income) have fallen over this time period.

Having said that, our economy is making the transition from enjoying the fruits of the mining boom (which is now well and truly over) to a more diversified and balanced economy.  This transition is not easy, however it will deliver a far more resilient and dynamic Australian economy in the future.  This is a good outcome.  In the meantime we have stable employment growth and our economy is growing.  Recent economic data shows our economy growing at an annualised pace of 3% which all things considered, is an admirable effort.

What does this mean for markets?

As you know APC tilts our portfolios to particular sectors of the share market.  These are Smallcompanies and Value (or cheap) companies.  When sentiment is positive (or confident) these two sectors tend to outperform the broader market.  However when sentiment is negative, as it has been over the past 9 months, these sectors tend to underperform the broader market.  Over the near 30 years that APC has been operating, we have seen these times before.  Sentiment always returns to positive, from a period where it has been negative.  The only question we don’t know the answer to is when this will happen.  In the last six months small companies have outperformed both Value companies and Large companies in Australia and Globally.

What to do?

What we certainly do not do is panic!  We’ve seen these times before and we will see them again.  So, as per our communication in September last year, if you are a long term investor (not speculator) focusing on Wealth Accumulation, periods like this are fantastic buying opportunities.  If you are Consuming your wealth to support your lifestyle in retirement, APC has once again implemented our Defensive Pension Strategy, whereby we fund pensions from defensive assets (cash and bonds) only.  In doing so we protect growth assets (shares and property) by not selling them during heightened periods of share market volatility.

APC monitors these decisions regularly on your behalf.  Our Directors and Shareholders, as well as team members, are also invested in our Classic portfolios.  Rest assured that our recommendations to our clients are also the same recommendations for our own portfolios.