Black Tuesday wipes off $100 billion
THE biggest sharemarket plunge in almost two decades has wiped
hundreds of billions of dollars from the value of Australians’
savings, amid growing fears that a US recession could drag the rest
of the world down with it.
After two weeks of nervous declines, Australia and other markets
across Asia yesterday went into free-fall, savaging stock prices
everywhere in reaction to an overnight rout in Europe.
Australia’s main share indexes plunged more than 7% %26#151; their
biggest one-day falls since 1989 %26#151; cutting about $100 billion
from the value of shares across the main sectors.
The market’s 12th consecutive losing day left local share prices
more than 20% below their all-time peak reached last November
%26#151; technically heralding the start of a “bear market”.
Total losses were approaching $400 billion by the close of trade
yesterday, equating to almost $20,000 for every Australian.
With most superannuation funds heavily exposed to the market,
millions of Australians who hold super investments face the near
certainty of negative returns this year %26#151; ending a golden era
of annual double-digit growth.
Some of yesterday’s selling was driven by margin calls %26#151;
when investors who borrow to buy shares are required to repay some
money due to the falling values. Other selling was apparently
fuelled by blind emotion.
As panic set in, the website of Australia’s biggest online
stockbroker, Commsec, crashed after logging 40,000 transactions in
the first 90 minutes of trade. An average day has 50,000
trades.
Falling metal prices meant resource stocks were hard hit, with
shares in Rio Tinto dropping almost 12%. “You’ve got forced sellers
coming into the market, and often it is the case that they have to
sell the quality stocks,” said Heather Zampatti, head of wealth
management at Bell Potter Securities.
The fall in Australian shares was matched or exceeded by markets
in Asia and Europe. India’s main index plunged 10% on opening,
triggering an automatic halt in trade. In Japan, the Nikkei fell
more than 5%, as did shares in China, Taiwan and Hong Kong. Last
night, European markets plunged again on opening, but London’s FTSE
100 later regained some of the lost ground in volatile trade.
Early today Melbourne time, the US Federal Reserve acted
dramatically to boost sentiment and avert recession by cutting its
key federal funds interest rate by three quarters of a percentage
point. The move will add to doubts about whether Australia’s
Reserve Bank will lift official rates when it meets next month.
The global market rout has been driven by concerns about the US
economy as it is battered by the crisis in home mortgage markets
and the subsequent drying up of credit markets.
Many economists believe the US will fall into recession this
year, and some believe it already has. Either way, some effects of
a sickly US economy would unavoidably be felt in other parts of the
world, including Australia.
But economists are divided on how severe the fallout from a US
recession would be, with some believing China and India would
continue to boom. Clifford Bennett of Sonray Capital Markets said
Australians were witnessing “the biggest shakeout of equity and
financial markets we will see in our lifetime”. Legendary US
billionaire George Soros said the world was facing the worst
financial crisis since World War II.
While yesterday’s events evoked memories of the 1987 stock
crash, it was not nearly as sudden or severe. On one day in October
1987, the All Ordinaries index lost almost 25% of its value.
Federal Treasurer Wayne Swan yesterday moved to reassure
investors. “We are well-placed to ride out the turbulence that
flows from events in the United States, even though we are not
immune from it,” he said.
Fiona Reynolds, chief executive of the Australian Institute of
Superannuation Fund Trustees, said the fall was part of a normal
market cycle and people should ride it out, even if their super
accounts went into the red. “People shouldn’t panic and go and move
all of their money,” Ms Reynolds said.
The last time Australians suffered widespread negative returns
on their superannuation was in 2002, when shares fell more than 12%
for the year.
There are also risks that the sharemarket slump will have
impacts on the wider economy - partly by denting consumer
confidence and making people spend less. It can also hit business
by making it harder to raise capital for expansion. “The worst way
of thinking about it is that people have lost a quarter of the
wealth they had in shares at the peak of the market around three
months ago,” said Saul Eslake, chief economist at ANZ.
“There are some people who have lost a bit of money and they
might have to reassess their spending. People within five years of
retirement who were counting on a few more years of double-digit
returns will have had a bit of a shock, so they might decide to
save more or work longer.”
Ms Zampatti said investors should try to override their
emotional responses and look at the big picture, with many
well-performing companies trading at cheap prices. “Emotion is
there and you don’t know how much lower the market will go,” she
said. “It could easily go lower. But we think over the next few
months it’s going to be a very good opportunity (to buy), if you
stick to quality stocks.”
The sharemarket rout, if sustained, adds to the conundrum faced
by the Reserve Bank board as it prepares to meet on February 5 to
decide on whether to lift interest rates again.
Recent moves by the private banks to raise mortgage interest
rates independent of the Reserve Bank, coupled with the carnage on
the sharemarket, may be enough to prevent the central bank acting
this time. But with inflation forecast to exceed the bank’s target
of between 2% and 3%, some economists were still predicting a rate
hike of 0.25%. “(The market) is part of their deliberations,” said
Stephen Walters, of JPMorgan. “I don’t think this RBA board
decision is as clear cut as it has been for the most recent
decisions.”
Today’s December-quarter consumer price index figures, as well
as the latest move by the US Federal Reserve and US job figures,
are all expected to influence the decision.
Mr Walters said the global nature of the shares rout indicated
the Australian market’s fall was not a reaction to fears about the
local economy. “Investors around the world are shifting out of
risky assets,” he said.
“That tells you that it’s not specific to Australia. The markets
in Europe were down much more than the Aussie market, so it shows
it’s a global issue.”
These latest falls come after an unprecedented run of gains on
the market, fuelled by optimism on the strong Australian economy
and its trading relationship with China.
with AAP
