Overnight Turmoil Hits Australian Shares

Is the Australian share market as somewhat protected from international turmoil? Some believe the fact that Australia is further away from other falling markets creates a separation.

It’s not that our share market doesn’t blink when others are going under.  It simply doesn’t drop as much as others in times of trouble.

But the markets have been in a down turn for a while now. And last night global markets around the world slumped. Some of them reaching more than decade lows. Why? The tidal wave of selling coming out of China and sovereign wealth funds has dried up liquidity. Or to put it simply, there are too many sellers and not enough buyers.

Sudden drop

The majority of us don’t want to buy in a declining market. The fear is always that once we believe the bottom is near; our investment will be pushed lower. I believe these drops have little to do with intrinsic value. Instead it’s behavioural value that is driving global markets down.

So far this year, European banks have dropped more than 20%. And last night this trend increased. Deutsche Bank and Commerzbank dropped more than 7.4%. But this is nothing compared to the big three Greek banks, which slid more than 27% over night.

This news alone would affect our stock market on open the next day. But it wasn’t just Europe. The US joined in the decline, with US banks Morgan Standley dropping 6.4% and Goldman Sachs falling 4.8%. And as I said before a lot of this selling is coming out of China. Their foreign reserves dropped by US$100 billion last month. It was the lowest reserves have been in over three year. To curb the dropping yuan, Beijing continues to sell the dollar to prop up their own currency.

Many analysts are disagreeing with China’s actions. They believe China needs to maintain their foreign reserves. Why? Because it will allow China to withstand a balance of payments crisis. Recent capital outflows have been a major concern for the People’s bank of China. And there is a real risk of China burning through its foreign reserves to support the yuan.

The market turmoil has also forced investors outside of China’s boarders to sell. With markets becoming riskier by the week, government linked investors are selling assets to drum up cash. The riskiest assets have been sold off first and the European banks have been deemed extremely risky.

And as it happens the ones selling are the experiencing the most pain, oil producing nationals. The Middle East, Africa and Norway are all selling to gain back what they’ve lost from declining oil prices. It just seems like a domino effect so far. One bad event has led to another and here we are. China is selling to maintain their currency. And Oil producing nations are selling to maintain income. So it’s no surprise that the S&P/ASX 200 is down today, being dragged down by banks.


Source: Google finance

The above graph shows Australia’s big four banks over the past three days. The market turmoil was simply too strong for investors not to react. Yet does this pose an opportunity for value investors?

Value investors, like Warren Buffett, do not care what noise is happening within the market. All they want to see is a company that is intrinsically worth more than their share value. Valuing companies is usually done by combing through their financial statements and various other factors.

The economy may take some time recover. Yet this is exactly what value investors want. They want to buy stocks that have enormous potential to provide double digit returns in the long run.

If you have the stamina for emotionless investing, and you can watch your portfolio value dip slightly, it might be all worth it. In a few years you could be thousands of dollars richer because you were able to wait out the pessimism.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Making money in a declining market is hard. But it can pay off if you have the stomach to hold onto your positions. Market turmoil has even effective big blue chips, dragging down there prices. According to Money Morning’s Publisher Kris Sayce there are five beaten down blue chips that are a buy for 2016.

In Kris’s report, ‘Five Beaten-Down Aussie Blue-Chips to Buy Today’, he will tell you why these blue chips have been oversold. There’s one common denominator that makes these five beaten down blue chips a buy. And if you want to find out why, then pick up your free copy of Kris’s report.

To get your free report today, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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