Global equity markets and other risk assets have had substantial falls over the past month, typically falling about 15%. Year-to-date returns are now negative across the board. Other “risk” assets such as the oil price and the Australian dollar have also corrected significantly.

There is rarely a single identifiable event that precipitates this sort of market action, and we believe there are several contributory factors.

Background - Europe

Within Europe, the debt crisis has been slowly building for over a year now, but every apparent “resolution” has proved to be very short-lived. As well as Greece and Portugal, the other “PIGS” of Italy and Spain are now reaching the crisis point.

And the US

Over a period of little more than a week, the outlook for the US economy, which was widely predicted to rebound in the second half, has deteriorated significantly. The releases for 2011 suggest the recovery has slowed close to stalling point, raising fears of a second recession around the corner.

Political actions (or lack of them) have taken their toll on financial market confidence. The row between the President and Congress over extending the debt ceiling went “down to the wire”.
The political process was a major factor cited to downgrade the rating on US government debt from AAA to AA+.
The US July manufacturing survey was released last week with a slump to 50.9, its lowest level since July 2009 and well below expectations.

Market Outlook

The fall in equity markets has been dramatic, as markets typically overreact to short term data releases and extrapolate problems into the indefinite future.
The most likely scenario is for a slow and grinding recovery, which should be supportive of equities, but that a political/policy error could precipitate a more adverse outcome.
What next?

Given the level of uncertainty in the market, it is important investors stick to their long term strategic plan, hold their nerve and avoid being drawn into panic.

Please contact Chris Flook, KMW Wealth Solutions Financial Advisor on (07) 3275 7422 if you wish to discuss the impacts of the global economy on your finances.