The share market panic– what happened to the global economic recovery?

The fall in share markets over recent weeks reflects increasing worries about US and European growth and concern governments are no longer able to respond.

Shares are cheap, but the risk of a US recession has clearly increased and if one is on the way shares can get a lot cheaper. Short-term investors should remain cautious. However, if we are right and the more likely outcome turns out to be low messy growth but not a return to recession, then current valuations make shares attractive from a long-term perspective. Therefore averaging in over time would make sense.

How vulnerable is Australia to a new global downturn?

Australia is vulnerable to any renewed global downturn, given impacts on confidence, financial flows, and potentially trade. However, Australia is far better placed to withstand a global downturn and we see the risk of recession here as low at around 20%. Interest rates have a long way to fall. The Australian dollar would likely fall if the global economy returns to recession boosting competitiveness.

Public debt is a fraction of that in other countries and so more stimulus can be applied if need be. Corporate gearing levels are low and companies are cashed up. Banks are less dependent on global markets for funding than in 2007. Australian households have also built up a large savings buffer. Finally, our key export markets in Asia are more secure than those in Europe and the US.

Concluding comments

For short-term investors, there is a case to remain cautious. For long-term investors, attractive share market yields, low and falling yields on bonds and bank deposits and the likelihood of more monetary stimulus on the way suggests shares may be attractive on a longer-term basis, meaning there is a case to average in over time.