Sharemarket tipped for a 10 per cent pull-back

Markets have climbed to record highs but concerns about a sell-off are rising. Photo: Dominic LorrimerCould we be at the start of the sell-off in equities that many investment managers have spent months calling?
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Many developed sharemarkets are regarded as being expensive, still this hasn’t stopped them climbing to record highs. The Australian benchmark index S&P/ASX 200 is up 13 per cent over the past year, and is trading at 14.6 times forward earnings.

Wall Street has also been trading at records and at a valuation of 18 times reported earnings is at the highest since 2011. Back then, it was in the middle of a 19 per cent slide, its biggest during the current five-year bull market, according to Bloomberg.

But the Dow Jones index has been unable to hold above the record 17,000 mark and dropped 118 points overnight as investors locked in profits ahead of the second-quarter reporting season. US miner Alcoa was the first company to post results that beat expectations.

The sell-off is likely to weigh on the local sharemarket at the start of trade this morning, with the September SPI Futures down 20 points, or 0.4 per cent.

Longview Economics chief market strategist Chris Watling said that 2014 was on course to be one of the quietest years in terms of volatility in the last 50 years.

“Years without a pullback of 7.5 per cent are rare indeed” and there were only nine such years in the past 50, he said. Rarer still were years with no pullback above 5 per cent, with only one year in the last 50 years and only four since the start of the data in 1928,” he told Livewire.

While many investment managers see the market pushing higher over the next 12 months, a 10 per cent pull-back is what many were tipping. The last time the Australian sharemarket experienced a significant pull-back was in the third quarter of 2012.

“It is expensive,” said National Australia Bank analyst Emma Lawson in a morning note. “That has been the mantra right across asset classes for months. Then, periodically, markets get super worried about that and take profits. Across asset classes, and ignoring any of the underlying macro data or evidence that the liquidity rug isn’t going to be pulled out from under them soon, there is a move to unwind positions.”

Last night, US and European stocks extended a sell-off, with the Nasdaq sliding the most in two months.

US small caps were hardest hit, with the Russell 2000 underperforming the wider market. This drove yields lower but boosted the Australian dollar and New Zealand dollar.

The Chicago Board Options Exchange Volatility Index, which measures the level of fear in the market, added 5.7 per cent to 11.98 points – its biggest two-day rally since early April, according to Bloomberg.

“A sustained rise in market volatility poses risks for the Australian dollar and yield plays, but it would need to be sustained before we worry,” said NAB’s Ms Lawson.

Global equities climbed to a high value of $66 trillion at the end of last week, helped by six years of gains in US stocks, including the Dow Jones breaking above 17,000 points for the first time.

Over the past financial year, the Chicago Board Options Exchange Volatility Index has remained near record lows, which has only further peddled the hunt for higher returns in equities.

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