The Five Biggest Risks Facing the ASX

The ASX has had a topsy-turvy day so far. Having hit a low of 5,015 points at 1:00pm AEST, the local market is down 13 points (5,082) at 4:00pm.

That’s a fairly good day in the context of recent selloffs. But it might just be the calm before the storm. There are five big reasons why major losses are in line for ASX in the future. If you wish to read about these, scroll down further.

For the moment though, I want to draw your attention briefly to today’s trade on both the Aussie and Chinese markets.

There were no major shocks on the ASX today. The big four banks are all up by roughly 1%. Meanwhile, mining giants BHP [ASX:BHP] and Rio Tinto [ASX:RIO] remain virtually unchanged.

Harvey Norman [ASX:HVN] is down 3.6%, trading at $4.16 a share. The retailer took out a $34 million stake in one of Australia’s biggest dairy farms. But investors clearly didn’t appreciate this diversification. But that was as wild as things got.

The biggest swings came on Chinese markets.

Earlier this morning, the Shanghai Composite Index (SCI) declined 4.6% at the start of trade. But it did recover by early afternoon trade.

At 2:00pm AEST, the SCI regained all of its earlier losses. The SCI is up 0.31% for the day, at 3,176 points. That, more than anything, is symbolically important for the Chinese government. Why?

Today marks the final day of trading on Chinese markets. They’re shutting down until next week in commemoration of the end of World War II.

That maybe explains why the government wants to go out on a high. These mid-to-late day rebounds are becoming a regular occurrence. There’s speculation yet again that government funds are supporting the markets.

I think we can safely say that’s exactly what’s happening.

The markets shape how Chinese citizens think about their economy more than anything. Standing by and watching markets slide isn’t an option for the government. What’s more, this intervention comes at a prickly time for China’s economy. Manufacturing figures released yesterday showed factory activity declined in August. That only added to suspicions that China’s slowdown is ‘harder’ than many expected.

Both Chinese and Aussie markets fared better than yesterday.

Yet looking ahead, there are still many dangers lurking in the background for the ASX.

ASX: The dangers ahead

Recent weeks have seen the ASX shed more than $70 billion off in market value. But it could get much worse in the near future. There are five risks in particular that threaten to derail the ASX in the future.

The first threat relates to fears surrounding China’s economy.

China’s ‘soft’ landing poses a problem for Australia, which is reliant on trade with China. The list of problems is as long as it is worrying. Stock market corrections, weakening trade and currency devaluations — you name it.

The last few months have proven China’s economy is grinding to a halt. This slowdown can’t help but impact Australia’s own economy too.

Australian GDP growth declined to 0.2% in the second quarter, the worst in four years. This decelerating economic growth will continue weighing on the ASX.

Second on the list of dangers ahead relates to Newton’s Law: what goes up, must come down. The Sydney Morning Herald reports:

The Australian sharemarket is in the third longest bull market is history, Wilson Asset Management’s investment analyst Martin Hickson says, so a correction was expected at some point.

Typically the average bull market lasts 55 months. We’re 77 months into the current bull market. We are due for a correction which we are now getting…a correction means entering a bear market, or a 20 per cent fall from the peak in April’.

Investors have had it good for a long time. But that time is coming to an end.

The third risk for the ASX is the potential for long-term rate reversals in the US. As credit expansion winds down in the US, it’ll wreak havoc on the global markets.

The likelihood of a US rate increase in 2015 is low. But once the reversal starts, free money will tighten. And there’ll be much less of it to play around on the stock markets.

The fourth risk facing the ASX is the long-running decline of commodity exports.

China is transitioning from an export driven economy to a consumer-led one. As it’s pace of construction slows, so too will its need for commodities like iron ore. The challenge for the ASX, and the broader economy, comes from handling the impact of this slowdown.

The fifth and final risk concerns global markets. Aussie investors aren’t isolated from headwinds on international markets. As panic grips global markets, it feeds back into the ASX too. The local sharemarket isn’t exempt from the anxiety taking hold of investors worldwide.

All told, the final five months of the year could be the worst we’ve seen in a long time. Investors should take note of the traps waiting ahead.

Mat Spasic,

Contributor, Markets and Money

PS: In the long run, the fallout from a Chinese market crash will have big repercussions for Australia. As domestic demand falls, so too will China’s need for our resources. Materials are the second largest sector on the ASX, and they’ll take a hammering when this happens.

Markets and Money’s Vern Gowdie predicts a major correction for the ASX in the future. Not only does Vern predict a major crash, but he’s convinced the ASX could lose as much as 90% of its $1.8 trillion market cap.

Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of Australia’s Top 50 financial planners.

He wants to help you avoid this coming wealth destruction. That’s why he’s written ‘Five Fatal Stocks You Must Sell Now’. As a bonus, this free report will show you which five blue chip Aussie companies could destroy your portfolio. You almost certainly own one of them. To find out how to download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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