Since April 2015 the All Ordinaries index representing the Australian share market has fallen 17.5% from its peak near 6000 points to sit just under 5000 points. This fall represents a lower expectation on the Australian economy and in particular the anticipated financial performance of the companies represented in that index. This expectation is due to global factors including economic weakness in various parts of the world including Europe, the United States and Japan but in main due to the slower growth in China.
The Australian economy continues to rely on the mining, agriculture and construction sectors. With the Chinese building & construction phase significantly slowing, the demand for commodities has also fallen, causing a significant reduction in commodity prices. Mining projects that were once profitable with a high commodity price are now struggling to break even. As companies fail or suspend mining activities, unemployment levels increase. Reduced consumer spending leads to a weaker retail sector and discounting of goods and services to attract business. Discounting leads to lower margins and companies will seek to tighten costs which may lead to further unemployment…and so the cycle will continue until something changes. Typically a share market will lead the actual economy by 6 to 12 months.
The question on every investors mind is when will we reach the bottom? Is it now or is there more to come? What will lead to an improved global economy and then in turn a recovery in the Australian economy? There are very few that have the skill or foresight to pick the absolute top or bottom of a share market. Even for the few that do, even less have the confidence and conviction to invest at a time that appears to be the worst possible time to invest. For the very few who do, these are the investors who make the very high returns.
For the vast majority of us that do not have the skill, time or luck to pick the absolute bottom of the market perhaps the best strategy is to dollar cost average into the market. This means investing on a regular basis during all points of the market. Whilst I cannot tell you when the bottom of the market will be or what stock to invest in, I can say with confidence that if you invest today you are investing at a 17.5% discount to the most recent share market peak in April 2015 and a 26% discount to the all-time peak reached in October 2007. As a specific stock example if you invested in BHP yesterday at $14.21 you are investing in the World’s largest mining company at a 44% discount to 12 months ago and a 67% discount to its closing peak of $44.46 in 2008!