More pain as Australian stockmarket nears bear market

The Australian

David Rogers, Markets Editor

22 December 2018

Australian shares are on track for their worst year since 2011, with most investors
facing double-digit losses as confidence in the global economy falters.

Local shares are set to be joining emerging markets and Japan in a bear market for the
first time since 2016. At the same time, a 12 per cent fall in the past three months
marks the worst December quarter for Australian equities since the global financial
crisis erupted in 2008.

The losses come on the back of a wild week in markets that saw further big falls in
shares and crude oil and a rush for safe haven assets including government bonds,
gold and Japanese yen.

The benchmark S&P/ASX 200 hit a two-year low of 5426.6 points before ending
down 0.7 per cent at 5467.6 yesterday.

The falls come on the heels of further sharp losses on Wall Street and renewed selling
in Asia. Japan’s Nikkei Stock Average yesterday closed 1.1 per cent lower at a fresh
15-month low, and China’s Shanghai Composite Index was down 0.8 per cent.

Last night futures pointed to opening losses for Wall Street’s S&P 500 and the Dow
Jones Industrial Average of 0.4 per cent and 0.3 per cent, respectively.

Deteriorating relations with China also weighed on sentiment after Beijing warned
Australia and other US allies that they risked damaging their relations by backing US
allegations that the Chinese government had been behind global cyber hacking and
intellectual property theft.

After Australia expressed “serious concern about a global campaign” of cyber hacking by a group said to be acting on behalf of China’s Ministry of State Security, China’s
Foreign Affairs Ministry warned that countries should “stop deliberate defamation of
China, so as not to damage their bilateral relations and co-operation in important

Beijing said the allegations “severely damaged China-US relations”, casting more
doubt on hopes that the retaliatory tariff increases would not go ahead after the trade
war “ceasefire” ends on March 1.

“Trade war technicals and geopolitics remains at the top of the list of concerns that
could upset the global economy in 2019,” Morgans chief economist Michael Knox
yesterday. “The ongoing US-China trade dispute could persist.”

Elsewhere, brokerage Bank of American Merrill Lynch said the US-China trade war
was “the main reason for market weakness this year”.

Among China-exposed stocks in Australia, Navitas fell 2.3 per cent, a2 Milk fell 1.6
per cent, Bellamy’s lost 3.6 per cent and Fortescue Metals slipped 1.5 per cent
yesterday, but Treasury Wine Estates rose 1.5 per cent, BHP was up 2.3 per cent and
Rio Tinto rose 0.7 per cent.

Although there was no broad sell-off in China-facing stocks, the tension fuelled
negative sentiment.

Still, this added to an already volatile week where global shares dived after the US
Federal Reserve said “some further gradual hikes in interest rates” and quantitative
tightening on “automatic pilot” would be consistent with sustained economic
expansion after it lifted rates and trimmed its rate projections.

The S&P 500 had its worst reaction to any Fed meeting since 2011 and, in a sign that
the longest US bull market in history may have already ended, the Dow Jones
Industrial Average was down 10.5 per cent for the month, its worst December since

Rising bulk commodity prices lent support to the Australian resources sector, although
West Texas crude oil dived more than 10 per cent to an 18-month low of $US45.67 a
barrel after record production from the three biggest producers in recent months.

Plunging oil prices may also be a canary in the coal mine for the global economy, with
a 40 per cent fall in the past three months reminiscent of the savage decline that
preceded the 2016 bear market in shares.

Underscoring the demand for safe-haven investments amid concern that economic
growth will slow due to lessening central bank liquidity, the US-China trade war,
slowing credit growth and a rapidly cooling housing market in Australia, 10-year bond
yields hit an 18-month low of 2.33 per cent, while the price of gold and the Japanese
yen hit multi-month highs.

After its fall this week, the S&P/ASX 200 index was trading on a 12-month forward
price-to-earnings ratio of 13.7 times, the cheapest PE valuation in almost four years
and significantly below its decade average of just over 14 times. The forward dividend
yield of the index rose to 5.3 per cent, the highest in two years.

From a decade high of 6373.5 points four months ago, the Australian sharemarket has
now fallen almost 15 per cent, its biggest correction — defined as a fall of at least 10
per cent — since 2015-2016.

The local bourse is now just 5 per cent off a bear market — defined as a fall of at least
20 per cent.

But analysts said a sustained bear market was not justified as a global recession was
not imminent.

“The risks remain skewed to further weakness into the early part of next year as
uncertainty remains regarding global growth and investor sentiment looks like it’s still
not fully washed out,” said Shane Oliver, head of investment strategy and chief
economist at AMP Capital.

“However, we remain of the view that this will be more likely part of a ‘gummy bear’
market that leaves shares down 20 per cent or so from their highs a few months back
after which they start to rally again — like we saw most recently in 2015-16 — rather
than as part of a long and deep ‘grizzly bear’ market like we saw in the global
financial crisis.

“The main reason for this is that we don’t see the US, global or Australian economies
sliding into recession anytime soon.”

David Rogers, Markets Editor