What: It's been a topsy-turvy week so far for the Australian share market with over $30 billion wiped off the market before Thursday's bounce reclaimed some ground. Meanwhile, from a technical point-of-view, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) finished Wednesday's trading session below the 5,000 point level for the first time in two years.
As recently as April the index was flirting with the 6,000 point mark. The drop to the 5,000 point level means that the market is down around 17% and dangerously close to official bear market territory which is defined as a fall of 20%.
So What: There are a multitude of reasons for the violent see-sawing of markets this week. Arguably the most significant factor has been the renewed focus on investors on the state of China's economy.
News that Chinese manufacturing – as measured by the unofficial Caixin flash purchasing managers index (PMI) has slumped to levels last seen during the deepest, darkest days of the global financial crisis (GFC) has certainly struck a nerve with investors.
Now What: Given Australia's huge reliance on China as a trading partner, the Asian nation's economic health is certainly important to our future growth rate.
There are a number of reasons to remain positive on the outlook for the ASX…
Firstly, the Australian dollar continues to fall and has now dipped below the 70 US cents level. As a country which is a net exporter of goods and services, the weakening currency is a good thing on balance and cushions the blow for our exporters.
Secondly, while stock markets globally (including Australia's) have arguably been inflated by excessively expansionary monetary policy of which one of the outcomes has been a huge chase for yield by investors, the upside of this could be that investors will soon be looking to redeploy money back into markets.
According to Commsec, Australian companies are set to pay out around $22 billion in dividends shortly. Amongst the biggest pay-outs will be a $4.6 billion distribution from BHP Billiton Limited (ASX: BHP), a $3.6 billion distribution from Commonwealth Bank of Australia (ASX: CBA) and a $1.9 billion distribution from Telstra Corporation Ltd (ASX: TLS).
Thirdly, amongst the stocks hardest hit by investor fears regarding a slowing Chinese economy have been resource stocks – the share prices of BHP Billiton and Rio Tinto are currently trading near seven-year lows. Significant falls in commodities, when cyclical, can create attractive buying opportunities.
