A rough start to the year…seven reasons not to get too concerned though

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Dr Shane Oliver
(Head of Investment Strategy and Economics and Chief Economist at AMP Capital)

Financial markets have started the year on a rough note as last year’s worries about China and global growth in the face of US monetary tightening continue.

This could drive more short term weakness. However, in the absence of US/global recession, which still seems unlikely, it’s hard to see a GFC style bear market.

The key for investors is to recognise that shares offer a higher return potential after sharp falls, selling after big declines just locks in a loss and that dividend income from a well-diversified portfolio is little affected by share market volatility.

Introduction

2016 has started much where 2015 left off with basically the same worries driving another bout of share market falls. Geopolitical concerns have played a role but the main issues are uncertainty regarding the Chinese economy, wariness about the Fed raising interest rates and the impact of a rising US dollar and falling Chinese Renminbi.

Share markets have seen sharp declines so far this year (with US shares -5.2%, Eurozone shares -6.2%, Japanese shares -9.5%, Chinese shares -14.6% and Australian shares -6.8%) taking them back to around the lows seen during the second half of last year, commodity prices are down further with the oil price falling to its lowest since 2009 and bonds have rallied with safe haven buying. This note looks at the key issues.

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