Australia | Jul 02 2009
By Chris Shaw
The numbers are in and the Austalian sharemarket recorded a fall of 22.1% in 2008/09 for its biggest yearly decline in the last 27 years, even after the index gained more than 28% from its lows of March.
The key feature of the market over the last year according to CommSec chief economist Craig James was its volatility, as evidenced by the magnutide of both the overall fall and the rally in the final quarter of the financial year that saw the All Ordinaries index in total trade over a range of 2,260 points for the year.
Other markets were just as volatile, the Aussie dollar running between near parity against the US dollar to a low of around US60c and oil trading between US$32 and US$147 per barrel.
While the past year was a poor one for Australian equities and follows the down year of 2007/08, James points out annual returns in the four years prior were more than 20%, meaning over the past six years the market has still recorded growth of around 11% per year.
But the past is now history and James’s attention is now focused on the future and what investors can expect going forward. Here the news is improving as James suggests the healing process for the global economy is underway as financial markets return to some form of normality and businesses are preparing to lift production levels again given current low inventory levels.
There remain a number of issues such as an oversupply of housing and the high budget deficits in the US, as well as the problems in inefficient industries like the US automakers. But sentiment should gradually recover and as it does so the pace of recovery could quicken in James’s view given low interest rates and the financial stimulus measures being proposed by many governments.
This doesn’t eliminite the risk of a “W” shaped recovery though, James pointing out a number of central banks will have to deal with the issue of removing some of the stimulus from rates at near zero without damaging the pace of any recovery.
Overall, James expects it will be the likes of China, India and other emerging nations that offer the greatest hope for the global economy given the high level of stimulus measures implemented to counteract these economies being dragged down by the weakness in the US economy.
In Australia the recovery process appears to be underway given rebounds in both consumer and business confidence, while James points out the stabilisation of financial markets has also helped along with the boost from China with respect to the buying of raw materials.
The combination of low interest rates and government stimulus has boosted acitivity levels in the housing and infrastructure sectors, while business spending is also improving. Given the fundamentals of the Australian economy are in reasonable shape, James sees growth improving to around 2.0-2.5% in 2010 after a relatively flat outcome this year.
On the financial markets the lows of March now appear almost certain to hold, but James sees room for a period of consolidation in coming months given the strength of the rally off those lows. On James’s numbers the All Ordinaries index should end the year at around 4,250.
Sector wise James notes as the banks have been one of the leaders of the recovery, investors could now do best to focus on resource stocks and infrastructure and housing dependent sectors of the market. While the strength of the recovery in the retail sector has been something of a surprise, James sees scope for further upside assuming unemployment rises only modestly, which is his expected outcome.
The undersupply of housing should support prices in that sector of the economy, in James’s view, his forecasts calling for house prices to gain by 3-5% in 2009 and 5-8% in 2010. As the global econcomy recovers he sees the Australian dollar as a beneficiary, expecting the currency will hit US84c by year’s end.
In contrast he suggests the outlook for the US dollar is mixed as currently there are concerns over the amount of bonds being issued as the US government tries to restore some economic growth, but as this fades the question will then become one of how to remove the monetary stimulus in the system as the economy again starts to pick up steam.
