Well it’s over at last – the end of what has essentially been a three year election campaign in Australia and hopefully also the end of political instability; but that may be asking for too much. Tony Abbott will be the next Prime Minister of Australia, Kevin Rudd will now get on with doing what he does best what he does best – sulk in a corner and the Australian stock market will probably not do a lot.
Over the last year or so I avoided writing about politics simply because I had grown tired of the whole Gillard & Rudd saga. I am no fan of either, but I did feel Gillard should have been removed from the office of Prime Minister by the electorate and not by the ALP party room. But as we know Kevin Rudd (and his ego) took the reigns of the ALP, called an election, and lost in a big way. We will now most likely have at least three years of an Abbott-led conservative government in Australia so what might that mean for the stock market?
Before I attempt some crystal ball gazing, let’s set some reference points by looking at where the Australian stock market is now and how it has been trending over the last few years and the last decade.
Firstly a short view.
ASX All Ordinaries Index (XAO) – 1 Year Chart
Over the last 12 months the ASX All Ords (XOA) and Australian stocks in general have done relatively well, but short-term market charts can be very misleading as I will discuss later.
If we ignore the sharp rally from the short term market low in November 2012 then the reality is, and as I have mentioned before, the market has basically edged along sideways. Yes sometimes it slumps a little and sometimes it makes a drive to push past 5200 – but when you step back and look at the charts it is clear that the All Ords is just bouncing around the 5000 recently.
I have also plotted the Simple Moving Average (SMA) on the chart above just to help get a feel for how the market is trending. My only comment regarding this is that after the rally from an over-sold level back in late 2012 the market resumed doing what is has done for some for years…i.e. edge sideways.
Some readers may recall that a few years ago I wrote that the logical bottom of the market was around 4800 – 5200 and that is where the market has spent a lot of time since it rallied off the GFC low in 2009. I also have commented that this level is what I would term a “recession” level and in my view the Australian stock market continues to trade in a recession-zone as it has for around 4 years now.
Now let’s have a look at the five year chart so I can make my point about short term market charts being misleading.
ASX All Ordinaries Index (XAO) – 5 Year Chart
Excitable finance journalists and market watchers always get themselves into a frenzy when the market hits a “high” but rarely do they put it into any perspective or provide a reference point. This year in particular many in the finance media became very excited every time the All Ords/ASX 200 pushed beyond 5000 as though it was a record high worth getting excited about.
Here is where my point about charts comes in. If you look at the 1 year chart of the ASX All Ords then perhaps reaching or passing 5000 is something to get excited about (for shorter term traders perhaps) but for longer term investors, when the the market moves near or passes 5000 again is just more of the same as the 5 year chart clearly shows. The reality is, and as I have said before, the Australian stock market has essentially gone nowhere since late 2009.
Once again I have plotted the SMA on the 5 year chart which again shows that the market is and has been essentially drifting up and down…but going nowhere fast.
If we step back further and look at another one of my reference points; the market over 10 years – then reaching or just passing 5000 becomes even less exciting.
ASX All Ordinaries Index (XAO) – 10 Year Chart
In addition to plotting the Simple Moving Average (SMA) again I have also drawn a line highlighting the 5000 points level. From my point of view the inability of the market to break well clear of this level indicates weakness not strength, and the painful reality is that the All Ords & ASX 200 both had already breached this level back in 2006!
Yes it’s true that in theory if you had purchased stocks and got the timing just right then over the last 12 months or so you could have made some healthy gains. But for longer term investors and many superannuation funds with Australian stock holdings the gains over the last few years have been nothing to boast about. In fact investors who may have put their stocks portfolios together during 2006-2008 may have no capital gains at all, or even be sitting on some losses.
I am not writing this to scare investors or talk down the market. I am simply highlighting how reference points matter and how looking at short term charts can be misleading.
Also note on the chart above how the SMA has moved pretty much sideways since the low of the GFC. I actually expected the market to move sideways but around a higher level (i.e. 5000) whereas the anchor point (if I can use that term) seems to be around 4500.
A Post Election Rally?
I expect it is quite possible that the Australian stock market will get a short term boost on the back of election result. However although an Abbott led government will have a solid majority in the Lower House, the Senate at the moment looks like it may make life difficult for the Coalition.
Also I don’t see the success of the Palmer United Party (PUP) as being a force for stability and in fact this may harm Australia’s international standing, especially if Clive Palmer continues to make some pretty wild accusations regarding Chinese spies etc. I’m not sure what is in the water in Queensland, but the State does seem to produce some very colourful characters.
So in summary I expect any boost the election result gives the market to be short lived after which the bigger influencers will come into play such as the state of the Chinese economy, U.S. Federal Reserve QE moves and geopolitical issues such as Syria. However looking beyond the next year or so there does seem to be some light showing near the end of the tunnel and we may start to see the market finally make a serious run up towards 6000 in 2014.