In what was the worst week for the market since January 2016, the S&P/ASX All Ordinaries Accumulation Index closed down 4.7%. The US Dow Jones Industrial Average fell more than 1,000 points on Thursday and is now down more than 10% from its January 2018 highs, a technical correction.
Data released on US wage growth last weekend sparked expectations of higher inflation which in turn saw bonds sell off on concerns about the pace of interest rate increases. Equity markets around the world followed suit, Australia included.
As we have mentioned in our Shareholder Presentations in both May and November last year, we are almost nine years into the current global equity bull market and risk has appeared mispriced for some time. The correction in valuations and heightened volatility experienced this week is indicative of investors’ uncertainty. To move into an official bear market, we would have to see a fall of 20% or more.
At this point, volatility remains high which makes us cautious. We will likely see sharp rallies in the coming period, however confirmation on whether we are entering a bear market is still not clear. This recent volatility is not unexpected as we have been through many market cycles before.
Over the last few weeks we have been increasing our cash weightings across our listed investment companies’ portfolios. We are well placed to withstand a correction in the market, given our cash holdings and flexible mandate. As has been the case in previous cycles, our ability to hold high levels of cash provides some protection in terms of preserving capital through periods of high volatility. Times of heightened volatility excite us and provide great investment opportunities. We are also optimistic about the opportunities that appear on the other side of any potential correction if we continue to see downward pressure on equities.
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Chris is the Chief Investment Officer of Wilson Asset Management, having joined the company in 2006. He is also the Portfolio Manager responsible for WAM Capital (ASX:WAM), WAM Research (ASX:WAX), WAM Active (ASX:WAA) and WAM MicroCap (ASX:WMI).