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PROPLAN > Market Movements over last few weeks > Oct 9 2014

Have been away for last 2 ½ weeks and have come back to a near 9% fall in the value of the ASX since our high for year was hit on September 3 at 5658 points.

 

What has been the reason and is it time to be worried?

 

There are a few reasons behind the recent falloff in prices. The primary one is concerns having been voiced by the IMF and the US Fed reserve around where they forecast world growth to be in 2015. The IMF has cut world growth forecasts for next year by 0.4% to 3.3%. They have attributed this forecast drop to tensions in the Middle East and Russia/Ukraine and another recession in the Euro Zone leading potentially to deflation in the zone.

 

Now for Australia this slowdown means less demand for our bulk commodities and a knock on fall in Iron ore prices. This then reduces demand for our dollar as our economy will weaken with less export revenue. The AUD falls against the USD and voila, shares get sold off. We have the next reason for pressure on our market……

 

We have had a lot of International money (in the world wide hunt for yield) flow into our banks, foods companies and Telstra for exactly the same reason we own them. (reliability and consistency and relatively high income).

 

International Money for Australian Shares come from USD and a lot of the selling of our Blue Chip Companies has been a result of the falling USD having an impact on these USD positions.

 

How does this work?

 

Last 2 years the AUD has been very stable at around the 93-98c USD mark. So when an international investor buys say $100,000 of CBA shares, first thing they have to do is convert the USD to AUD, so there $100,000 USD buys $105,263 AUD and this is used to buy (say at $80 per share) 1315 CBA shares.

 

Even if the share price of CBA stays static at $80, if the AUD falls to 85c USD the value of this International Investors CBA holdings falls to $89,420 in USD adjusted terms. But if you throw in a drop of $5 per share as well down to $75 for CBA, then the capital drop of our overseas investor becomes greater still at $83,831 or a 17% drop in their USD adjusted capital.

 

With the fear of the our dollar getting weaker still as the world economy slows, the International Investors just sells and gets out before it getting potentially any worse. This decision is not made on our domestic Australian Economy or the strength of CBA, it is driven by currency. This has happened over last 2-3 weeks.

 

The Silver Lining to the weakening currency Cloud…….

 

But as we get a weaker AUD this and the existing overseas investors have been flushed out, we will start to attract new International money.

 

Example, with the AUD at 75c USD, $100,000 of USD will buy $133,333 of Australian dollars to buy CBA shares!!  So eventually the weaker currency will be good for our stock market attracting international money which our relatively small market needs to move higher in value.

 

Does this mean our companies income generated from their sale of goods and services will diminish because the share price falls? I think you know the answer.

 

CBA is making no more or less money than it was 5 weeks ago when the share price was $82 versus the price today at $76. Woolworths and Wesfarmers are not selling less groceries, fuel or beer and wine because their share prices have fallen 5%.

 

The ASX which is effectively a daily auction will always move up and down in the short term with buyers and sellers competing for what they consider is a fair sale price based on the short term news about economies, currencies, unemployment rates, etc etc. In a years time there will be different reasons pushing around prices. The same way the things that influenced prices 2 years ago are today long forgotten.

 

Opportunities?

 

It does mean that if we have new money to invest, especially in super with contributions and dividends flowing in, that we can buy some of our model portfolio favourites at relatively cheaper prices than we could a month ago.

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