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.
Over the last few days I have noticed that many financial journalists and market commentators have suddenly begun shifting their positions from being bullish on the Australian economy to now telling us to be cautious.
I also believe it is time to be somewhat cautious, but I have been saying this for months as I wrote back in December 2009 in this article: The Australian stock market indicates all is not well.
A stock market correction was bound to come along, it was just a matter of time. (it always is) On the other hand I am pretty sure we will also see a rally follow in the weeks ahead and probably another correction or two this year. Stock markets are funny that way.
At present investors are being swamped by bad news ranging from concerns about European debt levels to geopolitical tensions between China and the United States. (that pesky Dalai Lama is causing trouble again!)
In Japan the Toyota brake problem has come not long after Japan Airlines (JAL) sought bankruptcy protection and then yesterday, a Sumo grand champion suddenly resigned after a drunken bar fight! Can anything else go wrong?
Well yes it can… we also have Bank of America executives being arrested, turmoil in Greece, trouble once again in Iraq, a very unstable situation in Afghanistan and President Obama strangely deciding that now is a good time to start picking a fight with bankers again.
Back in Australia we have seen some weakness in the retail sales figures, the situation regarding the Emissions Trading Scheme is as clear as clean coal and our friends over in New Zealand are dealing with unemployment at a 10 year high.
It is almost like there is a co-ordinated global effort underway to make any global economic recovery as difficult as possible!
Today as I write the Australian stock market is taking another beating but is is hardly anything to worry about at this stage in my view. (unless you have a margin loan of course)
The ASX All Ordinaries & ASX 200 are still a long way below the highs of 2007, so I hardly think they are anywhere near ridiculously overvalued. There may not be a lot of good value out there, but I don’t think you could say our stock market was in a bubble anymore…or could you?
I do worry a little however about the Australian domestic economy though and am concerned about the actions of the Reserve Bank. (as usual) At times the RBA’s appears bullish about the Australian economy, while at the same time sounding cautious.
For example the RBA’s Statement on Monetary Policy dated the 4 February 2010 contains this curious passage:
“Business investment in Australia, particularly in the resources sector, is at a very high level, although many businesses remain cautious about increasing their capital spending despite confidence having improved significantly. One area of particular weakness is non-residential building, with private-sector building approvals remaining at quite low levels. An important offset to the weakness has been a large increase in public-sector infrastructure spending, especially in the education sector”
So in plain English, business investment in Australia is being supported by the resources sector and government spending. Since government spending is being funded by racking up debt, what is really happening is that we are counting on the investment in the resources sector paying off, and in a big way because we need to take the profits here to help pay for school halls we didn’t need or those imported pink batts.
On one hand the RBA appears bullish regarding business investment, while on the other appearing somewhat cautious about business investment outside the resources & government sectors.
The entire statement from the RBA is full of these types of comments & observations. For example the statement also says that:
“Although the outlook for the world economy as a whole has improved, significant uncertainties remain”
but then later it says:
“In Asia, the issues are somewhat different. The Chinese economy has expanded very strongly and a number of other countries have been favourably affected as a result.”
So in this example they move from being bearish regarding the global economy to being positively upbeat about China and “somewhat” upbeat about Asia.
The overall statement from the RBA is not particularly helpful in the current environment because it pretty much confirms what I have been saying for a long time – that our economic managers are relying on China to keep our economy growing.
The RBA appears to be solely focused on China and fighting inflation. The United States and Japan, the world’s two biggest economies did not even rate a mention in the entire statement! (let alone anywhere in Europe)
It seems the RBA has grouped the global economy into three main regions: Australia, China & the rest. (Asia does get a mention, but that is only because they know it is near China)
Just to add to the confusion the RBA did not raise interest rates in February, so how confident can they be about economic growth in Australia? This action suggests to me that they are not quite sure what to do and the currency markets appear to have picked up on this with the Australian dollar dropping against the USD and the JPY for example, although of course the fall in commodities prices does not help our dollar much either.
Taking all of the above into account it is probably no surprise that Australian investors are a touch nervous and some panic has crept back into the markets. The only way stocks are going to get up near 5000 again is with the help of some good news and at present, it is difficult to think from where this may come from.
However I do feel that some stocks are getting close to being a touch oversold. I particularly like stocks in the energy and agricultural/food production sectors and I feel that these will do well in the years ahead despite the occasional pullback like we have seen over the last few days.
I also remain a believer that over the long term oil prices will climb well over $100 USD a barrel so with oil prices down near $70 now, it seems to be a good time to have a look at some listed stocks in that area as well.
I must stress at this point that my market timing skills are pretty poor and this is the reason I take a long term approach to investing in shares. For example I don’t normally expect to see a capital return on the stocks I invest in for at least 2-3 years, so this means that if I were to but stocks today I would be willing to hold them until around 2012 before thinking of taking any profits.
Finally on a positive note my old friend the Baltic Dry Index (BDI) does appear to be looking for a bottom after plunging below 3000. It is far too early to say that it might be about to rise again, but at least it looks like it might be stabilizing a little. With a little luck and a gag order on the G-20 leaders, we might just see it creep up again and take the stock markets with it!