The tumble that the Australian Stock Exchange (ASX) recently took at the end of August was the worst that the market has experienced since the Global Financial Crisis (GFC) that occurred in 2007 to 2008. The ASX fall ended at more than 4.1 percent down at 5001.3 points, the lowest it has been in over 2 years.
In the wake of the fall, global markets experienced a selling frenzy overnight, which saw US stocks join Europe and Asia selloffs. This saw the Standards and Poors 500 Index fall towards a correction, the first that its had in approximately 4 years.
The Australian dollar closed out at US72.3c after losing a cent in value as a result of the ASX fall, and Chinese shares dropped to 8.5 percent. Economists said the panic gravitated from China and that there was no evidence to suggest that global economies were heading for another downturn. However, this information didnt stop investors from selling off shares in an effort to reduce their losses.
How Did Australian Banks Fair in the ASX Fall?
All Australian major banks entered into a bear market when the ASX fell and investors wiped around $85 billion from the combined market value of the Australian New Zealand Banking Group (ANZ), Westpac, National Australia Bank (NAB) and Commonwealth Bank Australia (CBA), which equated to a 20 percent drop. The plunge in share value was the sharpest that ANZ has experienced, which resulted in the bank being overtaken by NAB as the countrys third-largest lender in terms of market capitalisation.
The ANZ was the hardest hit in the ASX fall, due to its association with Asia, with a 23.9 percent loss from an April peak of $37.25. The other lenders have fallen by more than 21 percent.
A bear market typically occurs when share prices fall from a peak value by 20 percent or more, and investors are then pessimistic about a market recovery. After ASX falls, the combined market capitalisation for the big four Australian banks dropped from $475 billion to approximately $390 billion. This suggested that investors were electing not to invest with the banks as they searched for higher yields, even though just three months earlier three out of the big four banks had hit investment return highs.
How has this Fall Affected the Big Four Banks?
This drop in ASX value is causing concern over how banks will cover costs. Recently the Australian Prudential Regulation Authority (APRA) ordered the big four banks to hold larger capital buffers to reduce their debt risk as it appears that they are no longer in the golden era of record profits. In addition, the banks have been supported by fewer customers defaulting on their loans, but APRA are concerned that this may change in the future.
Economists suggest that the fall in bank share prices was worse than other stocks such as utilities, infrastructure and real estate investment trusts. This was attributed to investors having less faith in banks due to changes in lending policy being made, which altered lending criteria making it harder for borrowers to acquire a home loan. Therefore, it is suggested that negative sentiment towards big four bank shares may continue for some time.
Why has the Fall in the ASX Occurred?
ASX chief executive Elmer Funke Kupper said he was not sure whether the fall in the ASX was a market correction or if it was associated with a far deeper issue, but he did note that there had been greater market volatility in share prices recently. Kupper said it was very unusual to have higher volatility during the reporting season, which is usually a more predictable environment where companies meet expectations.
Economists suggest that if the fall in ASX is a market correction, then it should stabilise over the coming weeks. However if its attributed to Asia, in particular China, having issues with its economy then this could present problems. This is due to the fact that China is estimated to represent approximately 30 percent of global growth, and if this falls then the rest of the world is unlikely to be able to carry this, meaning that global growth will begin to soften.
Overall, economists feel that the Australian market should begin to outperform regional markets, in this type of environment, due to the defensive market switches that are expected to be made by investors into the local market. It is estimated that these switches are likely to be made because the Australian market is well capitalised, yields are higher, and Australian banks are some of the most capitalised in the world. This makes the Australian market very attractive, despite recent falls in the ASX.
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Written by eChoice
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