Australia is at risk of an imminent market correction that would leave thousands of older Australians approaching retirement out of pocket.
Several analysts have told the ABC’s PM a major stockmarket correction is imminent.
Reserve Bank governor Philip Lowe admitted in June he did not understand why the bond market was pointing to a recession while the stockmarket was screaming boom times ahead.
Generally, stockmarkets improve with the economy, so a rise in the stockmarket normally coincides with rising interest rates.
Right now, the exact opposite is true.
“Something’s clearly wrong,” veteran market watcher Marcus Padley said.
“Why are interest rates going to be 0.75 per cent by the end of the year? What’s so terribly wrong?
“You wouldn’t imagine there’s much wrong if you take the post-election euphoria about taxes and the housing market into account.
“But that is the story being told by the bond markets and clearly nobody quite knows what it is, but so far it’s been very good for equities and clearly no one is really considering what the root problem is.”
‘Bond markets are screaming’ economic downturn
Saxo Capital Markets strategist Eleanor Creagh supports that view.
“It’s highly likely investors are going to have to be a lot more discerning throughout the second half of this year,” she said.
“Both bonds and equities have delivered outsized returns to date, but someone is going to end up spectacularly wrong as the current disconnect is actually irreconcilable.
“If the business cycle continues to deteriorate, equity markets are going to have to face reality and, I guess, surrender to what the bond markets are screaming. Our bets are with the bond market being correct at this stage.”
Many sharemarket analysts look at charts of the ups and downs of share price movements to gauge trends.
When stock prices run up very quickly, one indicator known as the Relative Strength Index rises above a critical line.
It has just risen above that line, pointing to a stockmarket fall.
Ms Creagh warns a major stockmarket correction is possible.
“I would say potentially a 10 per cent correction, or somewhere in the region of 10 to 20 as well,” she said.
Mr Padley goes a little further in his warning of a market downturn.
“Clearly a market correction, for whatever reason, if it’s going to be a significant one would be somewhere in the range of 15 to 25 per cent,” he said.
If there’s a major rattle, recovery should be quick
A big stockmarket fall can cause a lump in the throat for anyone heavily invested in the sharemarket or who is in, or approaching, retirement.
As the stockmarket approaches a record high, a key measure known as the price-to-earnings ratio shows share prices are above average relative to earnings, but analysts say they are not at extreme levels.
Private client adviser James Rosenberg advised people to ride out any bumps.
“Don’t forget that good companies are good companies, whether their valuation is high or low,” Mr Rosenberg said.
“If you do own quality investments, and the market does have a significant correction, just ride it out.”
Ms Creagh said retirees should start thinking about where growth is heading in the next 12 to 18 months, and whether they want to remain fully invested in the sharemarket.
“Really make sure that, overall, your portfolio has a low ‘beta’,” she said.
“That means that when the market moves down, your portfolio is not going to be as susceptible to that market volatility.”
Small investors look to the longer term
Kaiman Wong, an investor from Darling Point, NSW, has taken that advice on board.
“I’m personally looking for something in healthcare, or high-tech industry,” he said.
Mr Wong is aware the stockmarket could fall over at any moment but, as the father of a young daughter, he is thinking long term and wants to start building a nest egg for her.
“I’m basically looking for a long-term investment, and the current situation, or the pricing currently will not be affected by my long-term investment strategy,” he said.
But other investors are nervous about the potential for a market correction.
Former school teacher, 75-year-old part-pensioner Peter is still licking his financial wounds after a recent investment went south.
“I just lost $60,000 by selling Bank of Queensland when it tanked a few months ago,” he said.
The stock crash came at a particularly bad time in life for Peter. His daughter, recently divorced, needed help paying her legal fees.
“It’s pretty grim,” he said.
“I should have kept Bank of Queensland, but seeing I sold them, I’m just staying with Westpac and getting their dividends each year – I’ll get some in November.”
When asked if he was worried about a correction, Peter replied, “only from the point of view that if it went down really badly”.