AMP Capital chief economist Shane Oliver said the risk of an “accident” flowing from poor emerging market growth and depreciating commodity prices is a foremost concern to markets.
“A lot of bad news has already been factored in for emerging markets with forward price to earnings multiples around 10 times (compared to around 14 in Australia) and a 40 per cent fall in their currencies,” he said.
“But while valuations are good and extremely negative sentiment towards them is a positive, their economic cycle and liquidity backdrop reflecting high interest rates in some countries are bad.”
Mr Oliver said investors need to monitor whether emerging markets start to pull down growth in advanced economies.
“Perhaps the biggest risk associated with the collapse in emerging market currencies and commodity prices is the risk of an accident they might throw up.”
Mr Oliver noted that commodity prices are now down 50 per cent to 70 per cent from their highs several years ago. The sector may continue to decline as supply rises.
Although emerging markets are an area of concern, Mr Oliver argued that the cyclical bull market is likely to recommence as markets follow seasonal patterns.
“Typically the period from May that we have just come through is the weakest period of the year.
“October is known as a ‘bear killer’ month, as it often sees market declines bottom ahead of seasonal strength into year end and the new year.
"Our broad assessment remains that the cyclical bull market in shares is likely to reassert itself in the seasonally strong months into year end," he said.
Mr Oliver suggested that investors remain aware of other economic hotspots such as the Chinese economy, US Federal Reserve, Spanish general elections and Australian growth rates.
