The Australian sharemarket has taken a dip in the past few weeks, but it pays to keep things in perspective.
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Australian shares have experienced a run of volatility since mid-October, when headlines warned $50 billion had been wiped off the value of the Australian Securities Exchange (ASX).
These sorts of reports are always unsettling. But let’s look at the bigger picture.
The total value of stocks listed on the ASX is $1.9 trillion. So while a fall in the ASX 200 – which tracks the nation’s 200 biggest listed companies – from 6172 at the start of October to 5834 in mid-November is significant, it doesn’t mean the sky is falling in. It does help to understand what’s going on.
First, interest rates are moving higher in the US. It’s a sign that the US economy is in good shape – so much so the US Federal Reserve has not just raised rates, but has also made it clear more rate hikes could be on the cards.
That matters to markets because for many years, US companies have paid near-zero interest rates.
Many have taken advantage of cheap loans to increase their debt levels, and just as higher lending rates force households to tighten their belts, the same can be said of companies.
The thing is, sharemarkets react, to different pieces of news all the time. When investors become rattled, it can be tempting to bail in a hurry – even though it can mean copping a loss.
On the plus side, the Australian economy is continuing to grow, interest rates are low, and investors can still pick up some healthy and tax-friendly dividends.
Paul Clitheroe is chairman of InvestSMART, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.