AMP Capital's Shane Oliver said share markets this week were negatively impacted by concerns over the US Federal Reserve, Chinese growth and the loss of breadth in the US share rally.
Mr Oliver said geopolitical threats also continue to weigh on investor confidence.
“While the global threat from the Ukraine conflict seems to be receding a bit, the conflict with IS in the Middle East is hotting up, bringing with it the threat of global terrorist activity,” said Mr Oliver.
“Terrorist attacks are horrible in terms of their human consequences and there is no doubt that an IS terrorist attack in a western country would be taken badly by share markets.”
Mr Oliver said it is important to remember that while the various Al-Qaida-related attacks caused an initial negative impact, share markets soon recovered.
“It only took just over a month for the US share market to recover from its 12 per cent post-9/11 slump and it took the UK share market one day to bounce back from its 1.3 per cent fall on the day of the July 2005 London bombings,” he said.
Mr Oliver said despite the risk of short-term weakness in the share market, he expects that markets will see “nothing more than a healthy correction, allowing shares to let off a bit of steam”.
“We still don’t see the signs of shares being over-valued, over-loved and over-bought normally seen at major market tops,” he said.
“Valuations remain okay, global earnings are continuing to improve on the back of gradually-improving economic growth, global monetary conditions are set to remain easy, and there has been no sign of investor euphoria.”
Mr Oliver said the falling Australian dollar will initially be a drag on the Australian share market as foreign investors retreat to the sidelines, but it will begin to become a source of support as it flows through to upwards revisions of earnings expectations.
“Roughly speaking, each 10 per cent fall in the value of the Australian dollar boosts company earnings by 3 per cent,” he said.
“The combination of soft commodity prices, the likelihood [that] the Fed rate hikes before the RBA, and relatively high costs in Australia are expected to see the broad trend in the Australian dollar remain down.”
