06 Oct September Market Commentary
Most major indices around the world moved lower during September and the Australian All Ordinaries index was certainly included amongst those. Of note particularly is the move back to our Fair Value range in Listed Property. Returns in International Equities have been bolstered by the weaker currency and we continue to favour the more attractive valuations in Emerging Markets and Asian economies in particular.
Many investment markets have displayed a level of volatility to which we have become unaccustomed if we rely only on our short term memory. We are all susceptible to what behavioural finance refers to as recency bias, which is simply the tendency to think that recent trends are likely to continue into the future. More commonly we see this trend in investors chasing last year’s best performing investments and asset classes, which as we know leads to buying at high prices and conversely selling at low ones. In this instance, and in a related sense, many investors have become comfortable with steady increases in major equity markets which in some cases haven’t recorded a significant decline for several years. That comfort can be thought of as complacency, and it leads to suppressed volatility measures and prices not reflecting sufficient upside potential for the risk being assumed in a range of investments.
One of the most popular gauges of market volatility is the VIX index from the United States, which measures the level of insurance that professional investors are purchasing against a short term market decline. A lower number on the so called fear index means less protection is being purchased, and a higher number means investors expect greater volatility. The chart on the left shows this fear index over the last year, and indeed there has been quite a spike in recent weeks. However, if we take a longer term perspective and look at the chart on the right which shows the same measure over the last decade, then we get a very different picture.
Whilst the above charts relate to US equities, the Australian share market has also recorded a sharp decline in September and our currency has also finished the month down more than 6% against the US dollar. Both the Financials and the Resources sector were down by around 7% during the month.
The banks are clearly integral to most investor’s portfolio positioning, and thus we reviewed with interest the Reserve Bank of Australia’s recently released Financial Stability Review. This is a comprehensive document released twice yearly that runs to more than 60 pages, though seems to have been summarised in much of the financial press with just ten words: “the composition of housing and mortgage markets is becoming unbalanced.”
On the left above is the total lending commitments from Australian banks for housing, with the red areas being lending to owner occupiers and the blue showing lending to investors. The lighter shades of each show lending for new construction and the darker ones for existing dwellings. On the right hand side is the proportion of each of those four categories in the total, which clearly shows that lending for investors buying existing dwellings has increased significantly over the thirty year period shown. What is less clear is why we have suddenly arrived at a threshold that might justify some of the headlines of late.
It would seem prudent that the RBA and other regulatory bodies such as APRA are considering additional policy moves as part of their ongoing efforts in the years following the financial crisis to ensure that our banks continue to be soundly regulated. It was in no small part due to that sound regulation that we were able to weather the crisis better than almost all other developed economies. The Chairman of the Australian Prudential Regulatory Authority recently set out the post crisis policy response in four main areas: shoring up confidence, reducing the probability of bank failure, minimising the impact when a bank does fail and improving the behaviour of the industry itself.1 In coming months there will be additional regulatory requirements come into effect focusing on bank’s liquidity and funding positions. We will also very likely see some standardisation in internal bank modelling that determines the level of capital they are required to hold. We view these developments as positive for the sector, we note some recent moderation in housing prices, and we see no short term catalyst to do other than what we have outlined to you in earlier commentaries with respect to Australian Equities.
- Wayne Byres, Perspectives on the Global Regulatory Agenda. RMA Australia CRO Forum. 16-Sep-14.
DISCLAIMER: The information in this commentary has been provided for publication by Implemented Portfolios (ABN 36 141 881 147. AFSL Number 345143). The information has not been verified by Implemented Portfolios or Adapt Wealth Management Pty Ltd (ABN 76 821 231 362 Corporate Authorised Representative of Paragem Pty Ltd AFSL 297276) but is believed to have come from reliable sources as noted in the acknowledgements. No Liability is accepted by Implemented Portfolios, or Adapt Wealth Management Pty Ltd, its Directors, officers, employees or contractors for any inaccurate or incorrect information. The information is a broad commentary and there is no intention that a client should act on the information without seeking professional assistance from their own advisers (legal, tax, accounting, financial planning) for suitability in respect of their unique circumstances.
About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.