Shareswatch Australia

So far this year the Australian stock market had managed to edge slowly upwards and the All Ordinaries Index appears poised to settle above 4400 during the next week or so. Although the risks of a major Eurozone economic implosion appear to be fading, the signs are that the economy in China continues to slow and it appears the U.S. economy is still struggling. The situation in China in particular is likely to have a major impact on where the Australian stock market heads next over the following few months.

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.

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.

Over the last six months stock markets globally have become more volatile as Europe and the U.S. struggle to revive their economies.  To make things more complicated many advanced economies have racked up so much debt during the ‘good times’ that they now don’t have the capacity to spend their way out of trouble.  There will be no quick fixes and the situation is worrying enough to even rattle the commodities bulls.

A sure sign that an economic trend has been established is when the OECD finally jumps on the trend bandwagon and recently the OECD has joined the group of recently converted economic pessimists. Gone are the days when big borrowing, big spending governments would save the day – the theme of the day now is hang onto your hats because we might be in for a bumpy ride.

This week was quite a ride for stock market investors with the ASX All Ords and ASX 200 both trading at one stage under 4000 points.  However as the week progressed the markets started to claw their way back up and things are not quite as worrying as they were a few days ago.  What investors will be trying to work out now is if the stock market rout is over, or is it just having a rest before it once again sends stocks falling?

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.

At the start of this year I had a somewhat bearish view of how the Australian stock market would perform during 2011 but the slump over the last few months has caught me by surprise.  Even stocks in the mining sector are being dragged down by global economic concerns at the moment and I don’t expect things to improve much this year.

For around a year or so I have gradually become more cautious about the outlook for the Chinese economy despite the assurances from mining company executives, the RBA and Wayne Swan amongst others that all is well. Without doubt the rapid development of the major cities in China has been nothing short of spectacular but surely we must ask ourselves: is this rapid growth sustainable over the long term?

Over the last few weeks the tragic events in Japan and the political unrest in the Middle East have shown just how fragile the Australian stock market is. Investors appear ready to move quickly out of shares and shift funds to less riskier assets when they sense trouble. This suggests to me, that people don’t quite believe that the Australian economy is as robust as many market commentators would have us believe.

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.

If you are confused about the conflicting  reports regarding the Australian economy and outlook for the stock market you are not alone.  Much of this confusion is caused by financial journalists who one day are talking about a double dip recession and then suddenly switch to chirping about a robust Australian economy once some positive economic data appears.

Well the Dow Jones closed this morning below 10,000 and for those financial writers who focus more on grabbing reader’s attention rather than on facts, that can only mean one thing: the U.S economy is heading for a double dip recession! Of course the fact that the U.S economy is actually expanding, as are other major economies like China, Japan and Germany, appears irrelevant to many market commentators who seem intent on making investors fear that another economic crisis is at hand.

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.

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?

Well September passed rather uneventfully as far as the stock market was concerned although in the last few days, it has pulled back somewhat. However the overall trend is undoubtedly upwards and this looks like it will be maintained for the rest of the year. Despite plenty of gloomy views the bull market lives on, at least for now.