Global share markets took a hit over the past week, down 1.6 per cent in Australia, 1.1 per cent in the US, 1.3 per cent in the Eurozone, and 0.9 per cent in China.
Weakness in the share market came off the back of continued monetary policy tightening from the world’s central banks, including the Reserve Bank of Australia (RBA), which lifted the cash rate by an additional 25 bps to 3.35 per cent.
According to AMP Capital chief economist Shane Oliver, “hawkish” rhetoric from central bank officials also contributed to subdued equities investment appetite.
Mr Oliver said he remains “reasonably upbeat” on the outlook for investment markets amid expectations of an easing in inflationary pressures, but conceded it “won’t be smooth sailing”.
“After a very strong start to the year shares are vulnerable to a pullback,” he said.
A swathe of headwinds would contribute to the volatility, including further hikes to interest rates aimed at curbing inflation; “high” recession risks; an increase to the US debt ceiling; and geopolitical risks around Ukraine, China and Iran.
“With shares getting overbought after the new year rally and seasonality turning less positive, shares both globally and in Australia are vulnerable to more of a pull back [sic] in the short term,” Mr Oliver continued.
But volatility should not spook investors into selling their equity stakes, according to Seema Shah, chief global strategist at Principal Asset Management.
Ms Shah said investors should instead look to broaden their exposure to offset any potential market impacts.
“Despite recent outperformance, with the possibility of a recession still at the forefront of many investors’ minds, some may be tempted to withdraw from this market,” Ms Shah observed.
“Yet, while downturns can indeed be difficult, history shows that they are often shorter-lived than bull markets.
Ms Shah noted that since World War II, bear markets have lasted for approximately 14 months, resulting in a market decline of approximately 36 per cent.
“In contrast, the average bull market lasts five years, nine months and returns 192 per cent,” she added.
“While the GFC did lead the S&P 500 down 57 per cent and lasted 16 months, once the market troughed in early 2009, it took just seven months to rise back 57 per cent.
“Furthermore, the ensuing bull market lasted almost 11 years and delivered 401 per cent of return for the S&P 500.”
