Investment Matters

Short term pain…

Short term pain...

This week, the Australian market (All Ordinaries, XAO) fell 1%, by itself nothing to worry about.  But it makes about a 7% fall this financial year, and 10.1% from its peak on 30th August.

That 10% fall from its previous peak makes it what the market calls a 'correction'.  Call it what you will.  It's a bit soggy.

The reasons for the fall seem to be a 'follow-the-leader' from the US.  That market has become nervous at an extended trade war between the US and China and whether that might reduce economic growth in both countries.  On top of that, US tech stocks (Facebook, Apple, Amazon Netflix, Google, etc) have been trashed.  Apple's share price has fallen 24% since its peak on 3rd October on the announcement of slowing sales of its latest iPhone.  This fall has cascaded across the sector.   The broader market (S&P500) is down 9.6% since its peak on 20th September.

The Australian share-market has felt the ripple of the US market.

We see this correction as little more than that.  Falls of 10% or more do happen.  That is part of taking the long-term upside.

First Samuel clients

First Samuel's clients equity investments have not been immune from the correction, with some stocks having large falls over recent weeks (albeit on quite low volumes).  Such movements do hurt, and we certainly acknowledge that.

But there are two observations to make.

1.  This is not a GFC

The companies in which we invest are in good shape, and whilst there has been some severe price drops in thinly traded stocks, we see little risk to the future of these companies.  This is not a GFC.  If there is any slight historical comparison it may be to the 'Tech Wreck' of the early 2000s.  But the Australian economy is growing steadily, interest rates are benign, inflation low and there has not been significant leveraged buying into the stock market.

2.  Markets do recover

As First Samuel clients have a long-term (3 year +) investment horizon, let's look at corrections in a three year context.

There have been a number of instances in the past where First Samuel investors in a 100% share portfolio have seen corrections larger than minus 5% in any 3-month period.  Let’s consider the table below (don’t cheat just yet by scrolling further down).  The bottom entry is for the three months to the end of October: -7%. There have been 10 other non-contiguous rolling 3-month periods of a worse than minus 5% return.

Fleurs article table 1

And 12 months later

Let’s consider what the market looked like 12 months after the correction started:

Fleurs article table 2

And three years' later...

Fleurs article table 3

Conclusion

The market correction that we are experiencing now certainly does hurt.  However, focus on the longer term provides some context and comfort.

- Fleur Graves