The 'Trump Effect' as global markets fall

The Australian share market was a sea of red earlier this week with investors fearful after the escalation of the US China trade war and talk of a potential US recession. Investors concerned about a market correction were asking whether they should sell now and buy back later or just ride out the market falling.

The All Ordinaries Index has been incredibly bullish over the past seven months making consecutive highs without any real pullback, which has not occurred since the move out of the GFC low 10 years ago in March 2009. As a consequence of the sustained rise, many investors have flooded into the stock market, and with every interest rate fall, more investors joined in the hopes of higher returns.

It is important to remember that all markets fluctuate with any rise or fall acting like a staircase where prices rise and then stabilise before moving higher. This year, however, the rise has been more like an escalator going to the top floor.

So what caused the Australian stock market to fall earlier in the week? It appeared to be a combination of both reporting season and President Trump’s imposed tariffs on Chinese imports that sent the market into a state of flux, resulting in a global sell off of equities. As a consequence, the question everyone is asking is should we be worried about further falls?

Despite what unfolded this week, my outlook for the Australian market remains bullish over the medium to long term, which I discuss in more detail shortly.

Earnings season intensifies

As for reporting season, the news was positive despite the heavy market sell offs. Transurban released optimistic full year results with increases in revenue. It also announced it was raising $700 million in equity to fund the purchase of the remaining stake of the Sydney M5 Motorway. Despite this, its shares were down around 5 per cent this week.

Shares in real-estate giant Mirvac rocketed this week after reporting an increase in its operating profit of $631 million, which is up 4 per cent on the previous year.

Suncorp also recorded impressive full year results with revenue of $15.5 billion and a final dividend of $0.44 cents a share. Despite falling heavily earlier in the week, it weathered the storm in the market and rose to regain lost ground.

AMP, on the other hand, continued to struggle, and after releasing its half year results on Thursday it was placed into a trading halt, as it announced its intentions to raise $650 million in capital. AMP reported underlying profit of $309 million, which was down 38 per cent on the previous year. This is no surprise given that the company announced a few weeks back that it would not be paying a dividend. My warning to investors is not to bottom pick this stock trying to grab a bargain, as many have tried this over the past few years and have gotten burnt each time.

AGL shares were down around 7 per cent this week after flagging future headwinds that are expected to negatively impact their bottom line.

Commonwealth Bank released better than expected news despite reporting an 8 per cent decrease in net profit to $8.6 billion. This was largely due to the bank deciding to leave dividends unchanged at $4.31 a share. Despite what has unfolded with the Royal Commission and the banks this year, this is a good result for CBA shareholders. Both CBA and Westpac are my preferred banks for those looking to gain exposure in the financial services sector over the medium to longer term.

In an unusual occurrence this week, all of the sectors in the Australian market were down, with Communication Services and Consumer Discretionary falling over 1 per cent, while Information Technology was down over 8 per cent and Industrials down around 4 per cent.

As for the top performing stocks in the ASX 100, Northern Star Resources is surging to break a new all-time high and is up over 8 per cent. Evolution Mining and Newcrest are both trading at all-time highs and are up over 6 per cent this week. If you don’t own these stocks right now, you have definitely missed the boat.

Looking at the worst performers, A2 milk and IAG fell heavily down over 9 per cent, closely followed by Worley Parsons, which was down over 8 per cent.

So, what do we expect in the market?

There is on old saying that wealth is the transfer of money from the ignorant to the well informed and, in the current market conditions, this saying really rings true. Anyone can make money in stocks when the market is rising, but it is those who are educated that profit when the market is volatile.

Regardless of what has occurred this week, my opinion of the Australian market has not really changed. While the high of 6,958 points that occurred on 30 July could be the high in the current bullish move, I am not discounting that the market will continue to rise to a new high over the next month before it pulls back into its yearly low, falling around 8 to 12 per cent sometime in September or October. Following this, the bull market will return and 2020 will be another bullish year for the Australian stock market.

If you are currently worried about the stocks you own, don’t be, and if you have a longer-term view, this means you can hold onto your stocks and sleep peacefully.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au