Shareswatch Australia

It wasn’t that long ago when ex-Treasury Head Ken Henry talked about the Australian economy being in a ‘Golden Age’. I guess when you can retire on a lucrative public service pension and then parachute into a highly paid job as an advisor to the Prime Minister the future does probably seem bright. But now in early 2012 as unemployment appears set to rise and the economy is showing signs of weakness, Ken Henry’s ‘Golden Age’ comment might end up in the same category as Tim Flannery’s ‘Dams will no longer fill’ prediction.

Recently the markets appear to have settled somewhat and the Australian stock market has steadily been heading higher so far in 2012. Could we be seeing the early signs of another bull market taking hold or are we about to see another sharp correction take the ASX All Ordinaries back down towards 4000 and perhaps lower?

Recently the markets appear to have settled somewhat and the Australian stock market has steadily been heading higher so far in 2012. Could we be seeing the early signs of another bull market taking hold or are we about to see another sharp correction take the ASX All Ordinaries back down towards 4000 and perhaps lower?

The ASX All Ordinaries Index and S&P/ASX 200 Index finished much lower than I expected in 2011, so this makes me somewhat reluctant to go on record and make an Australian stock market forecast for 2012. However the process of looking at the various economic data and trying to guess where the market will end is a useful one, so foolishly I will outline once again my Australian stock market forecast for the year ahead.

As I write today the Australian stock market has slumped around -4% so far after the Dow Jones fell -4.3% and markets in Europe also ended sharply lower. As per usual, many finance journalists are hurriedly pumping out scary stories and dramatic headlines to gain readers attention so it’s time to grab a cup of coffee, relax and focus on the facts.

As each week passes the moans of struggling businesses grow louder and finally it appears that the Reserve Bank of Australia (RBA) board members have woken up to the fact that the economy has been sliding backwards since late 2010. Once again the RBA had made a tactical blunder and raised rates too high just as they did as the global financial crisis was unfolding back in late 2007.

We are almost through a third of 2011 and the mood across global markets appears to be decidedly downbeat.  The bullish voices of late 2010 have now faded and even the Reserve Bank of Australia and Federal Treasurer are sounding cautious. But don’t be fooled by the talk that recent events have caused the global economy to face headwinds because the reality is that 2011 was always going to be a tough year.

Back in April last year I suggested that the Australian economy was not quite as robust as most market commentators appeared to think and that it was quite possible for economic conditions to deteriorate quite markedly over the next few years.  So now one year later after I wrote about a possible economic slump in Australia let’s have a look at how events have unfolded since then.

As the year has progressed I have noticed that my view of the Australian stock market and economy has become increasingly at odds with most of the mainstream market commentators back in Australia.  Whereas they see reasons to be optimistic and feel the economy is robust, I feel the situation is quite different and believe the Australian economy is dangerously unbalanced and possibly primed for a nasty correction.

Stock markets around the world have had a very volatile run over the last few weeks with everything from debt levels in Europe to housing statistics in the U.S.  giving scaring investors. But during times of market volatility it is important to try and spot the longer term market trends and not get carried away by sensational headlines or daily market swings.

Over the last week the Australian stock market has taken a turn downwards pretty much inline with markets across Asia, Europe and the U.S.  Once again no mater how much the RBA talks up our economy, the fact is that Australia’s economic health depends on how our major trading partners are doing and investors are starting to get worried about the global economic outlook.

All things considered 2009 was not a bad year for the Australian economy and certainly a good year for the Australian stock market. Now with the worst of the global financial crisis apparently behind us all should be well in 2010 correct? Well maybe, China willing, but where others see blue skies ahead for the economy I see storm clouds.

Both the ASX All Ordinaries and S&P/ASX 200 have been basically moving sideways now since September and although the market may seem to be drifting, it is actually reflecting fairly accurately the state of the Australian economy. For despite what some finance journalists seem to believe, the Australian economy will not be able to surge ahead simply because the Chinese are stimulating their domestic economy.

Despite how convincing market experts appear on television or how cleverly they put pen to paper, the truth is that nobody knows for sure how the global economy will perform next year. For every positive sign or trend there is a worrying one, and despite the Dow Jones having some strong days recently the fact is the U.S. economy is still in bad shape.

Have you noticed of late how the Australian stock market is just not listening to the Reserve Bank’s Glenn Stevens? No matter how optimistic the RBA Governor sounds the ASX All Ords refuses to surge past 5000, so what is happening? Are investors wrong about the state of the Australian economy and simply not picking up on the positive economic indicators the RBA is apparently seeing?

After the strong stock market rally today I think we can safely say the bear market of 2008-2009 is now well and truly over. The ASX All Ordinaries & ASX 200 are still clearly trending upwards and commentators who were predicting a Global Depression just a few months ago have started adjusting their forecasts.