The question on everyone's mind at the moment is, 'will financial markets recover?' The Australian sharemarket has seen significant falls since November last year. History shows that the sharemarket continually fluctuates and periods of downturn occur, however over time the Australian sharemarket has always returned to previous levels and even surpassed them. We expect the Australian sharemarket to recover- the more difficult question to answer is when will it recover?
At this point, economic commentary suggests that the United States is likely to enter a recession. This downturn and the turmoil engulfing US financial markets will undoubtedly affect the Australian sharemarket, with the impact likely to be felt for at least the remainder of 2008. However, it is important to remember that Australia's big banks are well capitalised and well regulated and should withstand the current problems, albeit with some volatility in share prices.
Lessons from history
Markets move in cycles and volatility is not new or unusual. While no one can predict exactly where we are in this market cycle or when the market will recover, history shows that falls in the Australian sharemarket have eventually been followed by a recovery. The table below looks at major downturns in the Australian sharemarket since 1987 and the recovery in the following 12 months. You can see that even after the longest downturns the Australian market always showed strong growth in the year after they ended.
Past performance is no indication of future performance. Source: All Ordinaries Price Index and IRESS.
Benefiting from the bounce back
You may find the current market climate concerning, but remember the long term trend of sharemarkets has been upward. While you may be tempted to withdraw your investments or switch to cash, this isn't always a good idea. Everyone's situation is different and you need to think about what is right for you - but by selling your investment now you are realising your loss, and forfeiting the opportunity for your investment to recover in value. Investors who have had the courage to remain invested during previous downturns have been rewarded with any upside that has followed.
For more on how you can take advantage of these opportunities, talk to your financial adviser or visit colonialfirststate.com.au
Remember this is general advice only and does not take into account your personal circumstances or financial situation. Think about whether it applies to you and consider talking to an adviser. Past performance is no indication of future performance. Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468.