The Australian market made six-year highs last week spurred on by strong demand for Australian bonds, equities and the Aussie Dollar.  The rally was short-lived and markets were quickly sold off in response to declines in the US and Japan equities.  Also some bad news out of China in relation to imports and exports didn’t help.

The Australian market continues to keep a close eye on China as investors remain concerned about the growth picture.  We will get more clarity around China's potential when the GDP data is released on Wednesday. The consensus expects growth to have fallen from 7.7% in Q4 to 7.3% in Q1.

We don't think that the Chinese economy is as weak as the consensus believes.  Although recent trade data has been lower than expected, there are some encouraging signs.  Iron Ore imports from Australia for example grew at double digit and the price recovered significantly from its recent lows.

Others investors are also optimistic, with a growing contrarian movement currently buying into emerging market equities in general.

Concerns about the valuation of technology stocks brought back memories of the dot com bubble.

There is little evidence to corroborate fears of an excessive over-valuation and we believe that any comparisons with the tech bubble of 2000 are misplaced.  Currently the technology sector is much less overvalued than it was at the turn of the century.  In March 2000 – the month in which technology shares peaked – PE ratio of the S&P 500 biotech index was 46. That’s more than twice today’s level of around 20.

When you look at the numbers, you also see that tech stocks are much more in line with the broader market.  For example, the elevated PE ratios for tech in 2000 were set against a broader market ratio of around 26 for the S&P 500. This compares to today’s PE ratios where the technology PE ratio is around 20.  This is only four points above the overall market rate of around 16.

We believe the current sell-off in the US is more likely due to technical reasons as investors take profits on markets and sectors that performed well during 2013. Once this correction is completed we expect the US market to resume its rally and continue providing support for Australia.

Japan is also having a contagion effect on Australia.   The Nikkei has fallen by around 10% so far in 2014. Recent weakness in the equity market has also coincided with some slight strengthening in the Yen - always a negative for Japanese equities.

The heavy selling of Japanese equities seems to suggest that foreign investors have lost faith in "Abenomics". There are also concerns that the recovery may be derailed by this month's consumption tax hike. The Bank of Japan’s board however still think the recovery trend is intact.

Whilst the tax will weigh on the Japanese economy in the short term, we continue to believe that Japanese equities will eventually perform.