How You Can Navigate This Global Market Chaos
You might be wondering what you should do amid so much global market volatility and uncertainty. As we have pointed out consistently, significant risks remain around the world particularly in the bond market; markets such as commodities and oil are in meltdown; and markets remain at the whim of Central Banks.
The good news is if you take an international perspective there are stocks that have dominant market positions, are growing by disrupting existing markets and are also offering good value.
There is no doubt the global macro outlook is dramatic and almost unprecedented in its uncertainty.
We have already witnessed a crash in commodity prices, such as iron ore; then late last year oil capitulated, seemingly out of nowhere.
The oil slump benefits consumers with cheaper fuel; but it is ominous for European growth: the crash occurred in the midst of a European winter, a usual time for peak demand.
Weak oil could also trigger geopolitical risks as it destabilises major oil producers such as Russia, the Middle East and South America.
Could bonds correct?
We have also consistently been pointing out the risk of a major bond market correction.
The prospect of Quantitative Easing in Europe, particularly, has crunched bond yields there in countries such as Italy, Ireland, France and Spain. A correction is likely in Europe at some point and most likely when growth and/or inflation returns there.
The European Central Bank is trying to stimulate growth through Quantitative Easing; and the imminent announcement could trigger some short-term reaction.
But over the medium and longer-term we don’t believe it will stimulate economic growth. Any positive impact for Europe will be through a depreciation of its currency, the euro, which makes Europe’s exports cheaper. The euro has already slumped around 20 per cent against the $US in the past six months. Further, we expect that QE will be matched with an end to austerity with European governments encouraged to lift their deficits.
A currency war
But further euro falls could exacerbate a ‘currency war’ between the US, China and Europe as policy makers seek to devalue their own currencies to make their exports more attractive.
The global uncertainty, of course, is flowing through to Australia. Investors in the likes of Japan and China see us as a relative safe haven; though our bonds yields are at record lows, they’re also a good relative bet.
That inflow of capital is propping up the $A; yes it’s fallen, but we think it needs to fall further (to around US70c) to stimulate key export sectors such as tourism and help rebalance the economy away from the waning mining sector.
What should you do?
Amid this uncertainty, you’re right to ask: what to do?
Domestically, we continue to recommend investors keep focussing on yield stocks such as Telstra and the big banks at the right price. You should also maintain some cash, despite low yields, to re-enter the markets should one of these global risks cause a shock and steep correction.
But for investors willing to take a global perspective, there are attractive stocks on offer.
Gain further insights from John Abernethy and his team of analysts, register for Clime's weekly Investing Report.
John Abernethy is the Chief Investment Officer (CIO), Executive Director of Clime Investment Management (Clime Group) and Chairman of Clime Capital Limited.