Share price slide no reason to panic

Published in the Hearld Sun, February 2018

Was the market rout this week a speed bump on the road to prosperity or a taste of woe to come? Karina Barrymore asks the experts

Share market plunges, billions of dollars wiped from investments, fears about rising interest rates — it would be easy to think the financial world has fallen in a heap.

But there’s nothing out of the ordinary about the latest correction.

Markets do fall in a heap, and then rise again, then fall in a heap again, on a regular basis — that’s how they roll, investment experts say.

Share prices ideally reflect the underlying value of each company but are also affected by sentiment in the wider market — for good and for bad.

“A savvy investor is never fearful,” says Dale Gillham, an analyst at fund manager Wealth Within.

“Firstly, markets never crash at the top. The heaviest selling and the biggest falls typically occur close to market bottoms.”

Mr Gillham says market patterns broadly unfold in one of three ways; uptrends, down- trends or sideways.

“When a market accelerates away from its major trend — which occurred in the US during the past year as it rose to new all-time highs — history demonstrates that it will eventually pull back to the trend,” he says.

AMP Capital head of investment strategy Shane Oliver also says investors should chill.

“Corrections in the order of 5 to 15 per cent are normal. In the absence of recession, a deep bear market is unlikely,” Dr Oliver says.

“Selling shares after a fall just locks in a loss.

Share pullbacks provide opportunities for investors to pick them up more cheaply.”

And although share prices have fallen, the dividends they pay has stayed the same.

That is, shareholders will receive the same payouts regardless of the market price of their shares.

During the past week, the Australian share market fell about 4.6 per cent.

However, in the US, Japan and the eurozone the losses over all nudged closer to 10 per cent — the level widely regarded as a correction — and in China, the market was down about 14 per cent.

But corrections, analysts say, are regular and “healthy” events that help get the “fluff and hype” out of the market.

The difference this time around is that investors have enjoyed a pretty smooth ride during the past nine years as global share markets steadily increased to record highs.

As a result, the latest corrections have come as a rude shock.

“This one has been a bit more severe than normal in terms of the speed of the fall, because the US share market went through all of last year without a decent correction,” Dr Oliver says.

“While no one likes to see share market falls, selling after they have occurred will only turn a paper loss into a real loss — with no chance of recovery — so the best thing to do is sit tight and stick to a long-term strategy.”

For Australian households, share market falls have led to a decline in value for most super funds.

But unless the fund switches from shares, the loss will not be realised.

“Superannuation funds will have been affected by the pullback in shares, with the fall in share markets implying something like a 3 per cent decline in a typical growth-oriented fund,” Dr Oliver says.

“However, it’s quite normal for super funds to see such pullbacks every so often and it comes on the back of average returns of 10 per cent last year and 10 per cent over the past five years.”

According to the Australian Securities Exchange and Deloitte, 37 per cent of Australian through direct purchases, with millions more owning them through managed funds including superannuation.

Despite the high percentage of individual share ownership, the vast bulk of listed shares are held by big institutional investors and managed funds.

“Generally, institutional investors will know these were the falls we had to have, as valuations were getting ahead of themselves,” Motley Fool spokesman Tom Richardson says.

“The market needed to let off some steam.”

Hedge funds, in particular, are expected to be diving into the market at the moment as they “thrive on volatility”, analysts say, but superannuation funds will be battening down the hatches until prices rebound.

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