Shares – Buy, Sell or Hold
Over the past twelve months the ASX 200 has declined from its high of 6373 to its current level of 5750 (at the time of writing) or 9.8%.
The Dow Jones has declined over the past twelve months from its high of 26,951 to its current level of 25,286 (at the time of writing) or 6.2%.
So why the current correction of the various market indices?
Over the past decade we have experienced unbelievable low interest rates. This in turn has encouraged investors to take risk by investing in the stock market, as interest rates on cash deposits were barely above inflation. It also meant that company corporate profits were higher since the interest expense in their Profit and Loss Statement were lower, as interest rates declined.
Well, now the trend is starting to turn. The American economy, in particular, is strong and accordingly their Federal Reserve is raising interest rates. By raising interest rates the Federal Reserve is hoping to make sure that their economy does not overheat. If the economy overheats then inflation will have a negative effect on their cost of living.
The good news is that the Federal Reserve is no longer propping up the economy with near zero interest rates.
One of the biggest drivers of inflation is wage growth. The US unemployment rate plunged in September 2018 to a 49 year low, meaning wage growth is now on the rise increasing the probability of high inflation.
In summary, high interest rates are bad for;
- corporation with a large level of debt.
- mums and dads that have large home mortgages or investment debt.
- for companies that are in the discretionary spending sector.
- current bond holders.
- investors who have a share portfolio with an emphasis on growth stock such as technology as opposed to value stocks.
The good news from our perspective is that we have been underweight in bonds and fixed interest for some time now, and clients will be aware that we have a preference for value companies as opposed to growth businesses.
Should you require further information on share investment, please feel free to contact Peter Quinn
by submitting an enquiry or calling us on +61 2 9580 9166.