As foreshadowed two weeks ago, the good times for superannuation fund and other share investors may have come to an end with sharemarkets around the world under selling pressure. It's too early to know whether this is merely a correction or possibly more likely an early warning of difficult times ahead.
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The trigger for the downturn was largely unexpected because the Australian dollar and share prices had been holding up well despite the continuing fall in commodity prices. The ending of quantitative easing in the United States was always expected to put downward pressure on US asset prices and other world markets. More unexpectedly, and partially confirmed by International Monetary Fund growth projections, there's a high probability that European economies including Germany could be moving back into recession. A more positive development is the steep decline in world oil prices resulting from increased Saudi production and lower world demand.
How these factors will combine to impact on world share prices is difficult to assess because both the US and China – the world's two largest economies – are still performing well.
The US Federal Reserve has indicated that it may hold off increasing interest rates if world economic growth slows but it may also want to slow any advance in the US dollar resulting from increased interest rates.
The prices of Australia's major mineral and oil producers have fallen by 10 per cent or more as commodity prices – especially those for iron ore and oil – have weakened. The key to future price movements is likely to be how much further the Australian dollar will weaken. It appears likely that the value could end up below the current US86¢ if the world economy continues to slow. A lower exchange rate will help sustain our economy and compensate for our falling terms of trade.
A lower exchange rate will not only help reduce the impact of lower export prices on our producers, but it will also help our manufacturing sector compete. For these reasons, domestic share investors can only hope that the exchange rate moves down if the fall in our terms of trade continues.
At a personal level, it's evident that world sharemarkets face more difficult times ahead and volatility is likely to be much higher. So far, there's no sign of the pressure on financial institutions that led to the global financial crisis and there's still time for investors to readjust their portfolios to accommodate increasing uncertainty and a higher risk of share price falls.
Both shares and property are medium to longer-term investments where value can fluctuate quickly. The time to sell is when confidence is high and not when markets are falling.
Daryl Dixon is the executive chairman of Dixon Advisory.
