van Eyk predicts continued volatility and sector concentration

The Australian market will continue to see elevated levels of volatility for the foreseeable future, while there will be a continuation of the concentration within the financial sector, according to van Eyk research.

There will be an increasing proportion of share trading performed through program or algorithmic trading (automated share trading through the use of computer programs) which creates market volatility, while the increasing concentration seen within our financial system will also add to volatility, according to van Eyk head of research John O'Brien.

Given poor market performance in recent years, if people are looking at changing their strategic asset allocations and transferring assets into different strategies that will also contribute to volatility, he said.

Speaking shortly after the announcement that the Commonwealth Bank would be looking to buy Count Financial, van Eyk chief executive Mark Thomas said with Government regulations seeming to encourage consolidation within the industry, we may eventually see the major banks owning 100 per cent of distribution.

O'Brien said there is data that shows financial sector concentration is happening in Australia as well as overseas.

"The biggest banks are getting more and more market share, not only in financial advice but in mortgages - in all types of assets," he said.

That creates the likelihood of more financial systems stress in the future because if institutions were too big to fail a few years ago, that is becoming even more the case, he said.

There will also be sluggish growth in developed economies in the near future that will affect Australia, on the back of excess leverage and consumption, O'Brien said.

Thomas, however, said he was cautiously optimistic because the markets are fairly attractive at the moment, with strong yields of around 7-8 per cent in bank shares, for example.

Term deposit rates will also be dropping from their old risk free rate of around 6.3 per cent to more like 2-3 per cent, because a weaker housing market means banks won't need to raise as much money to finance loans. The Government's bank guarantee is also close to finishing, he added.

People who were able to live on a reliable 6.3 per cent interest rate won't be able to live on 2 or 3 per cent, meaning anywhere up to $500 billion will be coming back into the market in other investments, Thomas said.