This year has been one of the most disruptive years to the Australian financial markets since the GFC.
Between the year-high in reporting season and late December 2018 we have seen the Australian share market, otherwise known as the All Ordinaries, fall by more than 10%.
What caused this painful reaction? There could be three key culprits:
The Royal Commission
Over the past year, if you looked at the business section of the newspaper you’d struggle to find a week where the Hayne Royal Commission wasn’t mentioned.
The inquiry into our major financial institutions like AMP Limited (ASX: AMP), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC), IOOF Holdings Limited (ASX: IFL) and Commonwealth Bank of Australia (ASX: CBA) uncovered a number of troubling issues.
Some of the issues included charging fees for financial advice that wasn’t provided, advisors not acting in the best interests of clients, and businesses charging fees to dead clients.
The Royal Commission has forced banks to repay hundreds of millions of dollars, with more remediation likely. That’s not even mentioning the lawsuits that fee-hungry law firms are putting together.
Our ASX index is dominated by the big four banks so their falling share prices have significantly hurt the overall Australian share market.
Falling house prices
One of the consequences of the Royal Commission has been a (perhaps rightfully) tightening of lending standards, which may have contributed to falling house prices.
Some of the other factors people have attributed to the decline include: China making it harder for citizens to get money out of the country, the Australian government making it harder for foreign property ownership, banks stopping lending to foreign nationals, out of cycle rate hikes by banks, unaffordability of house prices and a increasing supply of apartments being completed.
It isn’t as though every city is suffering. It’s only Melbourne and Sydney that have seen a significant shift and deterioration in the past year. Sydney house prices are down 8.1% over the past 12 months and Melbourne house prices are down 5.8%.
This has caused various consumer facing businesses to warn of worsening conditions, like car dealership business Automotive Holdings Group Ltd (ASX: AHG) and furniture business Nick Scali Limited (ASX: NCK).
Rising interest rates
The US Federal Reserve has been steadily increasing the interest rate.
Investors like to use the US interest rate as a comparison for how much they’re willing to pay for shares. The higher the interest rate, the less people are willing to spend on shares.
Famous investor Warren Buffett once said that interest rates act like gravity on share prices. Lower rates have allowed values to moon-bounce higher than normal.
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