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Australian Economic and Market Indicators – November 2012

November 12th, 2012 · Greg Atkinson · 24 Comments

Finally it seems the Reserve Bank of Australia and Treasury have had to accept that the mining boom has peaked or is peaking, which is something I have been talking about on this site for some years.  However the RBA, Treasury and Gillard Government all still appear to be relatively upbeat about the outlook for the Australian economy next year which is surprising,  since I don’t see a lot to be optimistic about as I review the stock market, housing market or a few other economic indicators.

Let’s start this brief review of economic indicators with a look at the ASX All Ordinaries Index over the last 25 years.

Australian Stock Market – ASX All Ordinaries Index 1988-2012

xao_asx_all_ords_index_1988_2012

On this long term chart of the ASX All Ords I have highlighted five key market phases.

1. The Build-up. This is when the All Ords, after few  major corrections, steadily moved up towards and then past the 3000 points level prior to the boom market taking hold from 2003.  This Build-up phase ended when the market slipped back during 2002 in the aftermath of the dotcom/tech bubble implosion.  I have drawn a rough trend-line in green to highlight this phase.

2. The Boom. This is the phase where our stock market soared as commodity prices and volumes rose plus the global economy was seemingly doing well.  This phase came to a crashing end when the GFC hit in late 2007.  I have drawn a dark blue trend-line to highlight this phase.

3. The Crash.  I have marked on the chart in red the GFC triggered slump from late 2007  to the stock market bottom which was finally reached in early 2009.

4. The Rebound. Basically a classic bounce off a market bottom. This pushed the All Ords up to around 5000 points by the end of 2009 and is indicated by the blue line.

5.  The Paralysis. This is the phase we are in now marked with a black line.  The All Ords is basically drifting sideways waiting for some reason to rally but is probably already sold down enough not to be in danger of slumping below 4000 for any extended period of time. (for now at least) This phase started basically at the end of 2009/the beginning of 201o.

I believe it is important to take these five phases into account when reviewing other economic indicators especially the last four phases which can be spotted fairly easily even without trend-lines on the 10 year chart of the All Ords below.

All Ordinaries Index (XAO) 10 year chart

asx_all_ords_index_10_year_chart_2012

Now if we look at some charts from the RBA’s latest chart pack (released last week) we can see they have much in common they have with how the All Ords has fared since 1988.

rba_index_commodity_prices_nov_2012

The RBA Index of Commodity Prices is interesting because it shows that during the All Ords Build-up phase that commodity prices we generally flat.  During this time it was the non-mining related stocks that helped the push the market higher especially the financials.

Then from 2003 commodities prices started to rise sharply and continued to push higher until the GFC sent commodities prices tumbling. After this initial slump in prices things got interesting (and worrying) because the rebound phase for commodities sent the RBA Commodities Index above its pre-GFC peak. Why?

The simple answer is that commodity prices got a boost thanks to quantitative easing (QE) and economic stimulus measures implemented across the G20 economies. In many cases this meant governments attempted to solve a debt crisis by getting in more debt or in the case of China, building, building and some more building apparently would do the trick.

But despite this second peak, prices for a whole range of commodities are trending downwards and although they will (and are) getting some support from QE4 in the U.S. and pro-growth policies in China, I believe they still have a lot further to fall.

The fall in commodity prices is already having an impact on the Australian economy and if they were to fall further, then it is likely house prices will come under further pressure even if the RBA cuts interest rates again.

Now let’s look at the residential property market which I believe demonstrates how commodity prices are putting a drag on home prices.

rba_dwelling_prices_nov_2012

Earlier I mentioned the five phases that the All Ords has been through over the last 25 years and if you look at the right hand side of the chart above and focus on the “Australia” line you will see that price rose before the GFC, pulled-back for a while during the GFC and then rose again to a new high after which they fell again on a national level.  That’s pretty much mirrors 4 of the 5 ASX phases I outlined.  (The RBA chart above does not cover the Build-up phase time-frame)

Clearly the stock market, commodities prices and dwelling prices are moving through similar phases which is hardly surprising. It’s also the reason I watch the real estate market (and many other markets) rather than just focus on share prices and stock market indexes.

The recent interest rates cuts by the RBA have helped prop up the residential property market but there is no doubt in my mind that if commodity prices start another run downwards then dwelling prices in Australia, on a national level and in most capital city markets, will fall.

The next chart I want to focus on is Household Wealth and Liabilities because this is where we can get a feeling for how the performance of the economy is impacting households.

household_weatlh_liabilities_1994_2012

This chart is probably the one that concerns me the most because clearly Net worth is falling and although debt levels, it could be argued are manageable, that’s mainly appears to be because Dwellings are are holding up Net worth.

Again if you look at Net worth you will see it has moved in similar phases to the ASX All Ords Index, the Commodity Prices Index and Dwelling Prices.

The big difference in my opinion is that the stock market took a major hit during the GFC, rebounded somewhat but has remained way below pre-GFC levels.

Commodity and dwellings prices however still appear to be relatively high and this suggests to me that are likely to drift downwards over the next couple of years.

Finally let’s have a look at GDP growth.

gdp_growth_1992_2012

There are many ways you could interpret this chart. Firstly it does show that the Australian economy has had a pretty good run for the last 25 years or so with just three questers of contraction.  But on the other hand GDP growth appears be trending lower with the 4% growth mark being reached less frequently in the last 10 years despite the mining boom.

Still the overall growth in the economy has been fairly robust for many years but can this growth be sustained during a period of lower commodity prices and reduced mining investment? Probably not would be my guess.

So in summary I expect that over the next six months or so commodity prices will continue to trend downwards, house prices will remain under pressure and  the ASX All Ordinaries will essentially still be moving sideways even if it does get back up near the 5000 level.

This article was written by Greg Atkinson who is the editor of Shareswatch Australia and the Managing Director of Ohori Capital. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


24 responses so far ↓

  • 1 Michael Prince // Nov 12, 2012 at 9:38 pm

    You always appear to be so negative. Which means as the market is cyclic you’ll always be correct at some time. Perhaps a less pessimistic view would do us all some good. Perhaps the world as we know it is coming to an end, if so we have a long way to go down to where most of the rest of the world is now. But listening to you we can only hope.

  • 2 Greg Atkinson // Nov 12, 2012 at 10:01 pm

    Michael as investors we need to deal with reality and the facts at hand. A few years ago during the height of the GFC I was criticised because I didn’t believe the global economy was about to implode and now it appears you think I am too negative. That might be correct, but I call things as I see them as opposed to writing feel good articles.

  • 3 Matthew // Nov 12, 2012 at 10:42 pm

    Greg I actually think this is a pretty well balanced narrative. My thoughts on a couple of areas:

    1) quality shares are probably under valued by around 10% in real terms while speculative shares are probably over valued by the same as people hope to strike gold

    2) slightly disagree on property. I think a sustained softness in commodity prices in the current global environment will see interest rates remain low, but not massively impact employment o wage growth as we have seen in the past couple of years. End result would be stagnation at worst.

    If on the other hand commodities were to rebound, this would be a catalyst for economic and therefore share market and property growth,

    I guess what I am saying is that from a property price point of view, this is about as bad as it will be this cycle

    What I as many others see as the most dangerous thing right now is any possibility of a return of our current incompetent government. If that threat is warded off next year, fingers crossed new PM Turnbull can turn this ship around!!

  • 4 Greg Atkinson // Nov 13, 2012 at 3:14 pm

    I guess in a few months we will have some idea if property prices are on the rebound or not. Personally I believe that if commodity prices fall back to early boom prices then further rates cuts by the RBA won’t be enough to stop further weakness in the real estate sector.

  • 5 Frank // Nov 13, 2012 at 3:39 pm

    Greg I dont think that “further weakness” is the correct term.

    I think most people can see, and have commented, that the market is as close to its bottom as we will probably see. A prolonged period of no to low growth is quite feasible, a large fall in values is at best highly unlikely.

    I agree with Matthew (or he does with me as I have said the same thing) the only thing that will subdue our economy in the next 3 years is a return of the current incompetant life sucking government.

  • 6 Ross T // Nov 13, 2012 at 9:40 pm

    All your graphs are pretty negative, however my shares have been improving , so all I can think is that investors are moving into income shares due to the low interest rates. It’s either that or the market has already factored in an Abbot win – I have been told that the market looks ahead about 12 months, but am not sure if thats true – they sure got Obama’s win wrong after all!

  • 7 Greg Atkinson // Nov 13, 2012 at 9:55 pm

    Ross the All Ords and ASX 200 have been edging up this financial year but over the last few years the movement has been basically sideways. Perhaps some money is moving back into stocks since it won’t earn much in a bank account these days. I also suspect money is moving around within the market as mining related stocks are now longer the market darlings and investors look at other sectors to invest in. Some of the defensive stocks have also been doing well – Domino’s being one which I covered in my last post.

    Anyway it sounds like you have a good mix of stocks, hopefully they will keep rising and make it a good year for you!

  • 8 BP // Nov 14, 2012 at 9:38 am

    The optimistic view:

    http://www.watoday.com.au/business/motley-fool/the-coming-boom-20121113-299t3.html

  • 9 Greg Atkinson // Nov 14, 2012 at 1:03 pm

    Oh an advertorial without a single chart posted as a “view” which contains this gem: “When deleveraging ends, we’ll have more flexibility to buy a car, take a holiday, or repair a roof – things we’ve probably been putting off for years.”

    Goodness me…

  • 10 BP // Nov 14, 2012 at 2:43 pm

    Yes, charts certainly helped prepare us for the GFC.
    I daresay there were millions of them proving all was well back in the mid-noughties.

    No farmer would sow grain without believing it would grow and ripen. No investor would commit funds without the expectation of likely return. No bank would ever lend money without a belief that it will be returned with interest… .

    Somewhere between those old Aussie truisms “We’ll all be rooned!” and “She’ll be right, mate!” lies the truth. It’s just a little too early to write Australia off… . 😀

  • 11 BP // Nov 14, 2012 at 4:18 pm

    Are more Aussies optimistic?

    “The Westpac Melbourne Institute Index of Consumer Sentiment for November, released today, has risen by 5.2 per cent to 104.3 per cent. A reading below 100 indicates more consumers are pessimistic than optimistic about the economy.”

    http://www.perthnow.com.au/business/consumer-sentiment-up-52pc/story-fn7kjv7y-1226516474899

  • 12 Greg Atkinson // Nov 14, 2012 at 4:27 pm

    Frank I guess we need to see if the RBA rate cuts give the housing market a sustained boost or if the slight rebound we appear to be seeing now on a national level, fizzles out by the new year. It’s too early to make a call either way at the moment I reckon.

  • 13 BP // Nov 14, 2012 at 5:58 pm

    Matthew, your comment is spot on:

    “…fingers crossed new PM Turnbull can turn this ship around!!”

    We need someone with a positive attitude, not another knocker… .

  • 14 Christian // Nov 24, 2012 at 11:32 pm

    i wouldn’t be so negative…

    it might be a good time go check out some short term trading opportunity for the 29th of this month.

    as consumer sentiment somewhat got some relief during the last couple of months i think there is a quite good probability of getting better than expected numbers for the new home sales numbers which could have quite some positiv impact on the stock market in general…

    so going long mid of next week might be a good idea in my opinion…

  • 15 rotton // Nov 29, 2012 at 10:55 am

    pretty negative mate! you know good vibes work sometimes..

    I am new in this site. Just wondering here to get ideas ^_^
    And the discussions really interesting.

  • 16 Greg Atkinson // Dec 2, 2012 at 7:03 am

    You could look at the charts I posted another way and come to the conclusion I guess that the housing market has bottomed out, the stock market is about to start a run up past 5000 and commodity prices are set to rise.

    Around February next year we should be able to spot some trends although it looks like the ASX All Ords/ASX 200 will be below 5000 for the next few months at least.

  • 17 Frank // Dec 4, 2012 at 11:42 am

    I think that there are some bargains still in the ASX200, but at 5,100 and above they are going to become more difficult to find.

    Same with property, an arguement can be made relating to undervalued sectors in the Australian market as well. Interesting article online yesterday for example that only WA and Qld have property prices below the 2007 mark while other capital cities have gained (modest) ground since then.

    I agree Greg, Feb will show the trend, the question to me though isnt north or south, it is north by how much, and once the recovery is undeniably underway we will see the bears kicking the dirt because they missed the bottom and moan all the way to the top.

    Gotta love cycles hey!

  • 18 Ned S // Jan 6, 2013 at 9:38 am

    http://www.smh.com.au/business/growth-expected-to-continue-but-at-a-sedate-pace-20130104-2c8yu.html

  • 19 Lachlan // Jan 6, 2013 at 10:00 am

    From your link Ned…”On interest rates, the panel on balance expects only one cut in the year ahead, but the forecast range is wide: from Gibbs, Anthony and Keen who expect four more cuts taking the cash rate to an ultra-low 2 per cent, to Norman, University of Tasmania modeller Mardi Dungey and former Reserve Bank economist Paul Bloxham, who expect between one and three interest rate rises.

    I think one rate cut is coming soon Ned. Among other things XJO stretching towards resistance, AUD threatening upward move.

  • 20 BP // Jan 9, 2013 at 11:01 am

    As Sylvia Nasar noted, most of the experts advising governments suffered financial hardship when the ship hit the fan.

    An interesting perspective here:

    http://www.watoday.com.au/opinion/politics/when-a-guess-is-as-good-as-a-forecast-20130108-2cep8.html

  • 21 BP // Jan 11, 2013 at 11:44 am

    Stimulating news here:

    “Abe’s government is set to to unveil a Y20 trillion ($A215 billion) extra budget on Friday designed to breathe life into the world’s third-largest economy, rebuild disaster-hit areas and beef up the military.”

    Are economists starting to get the picture, I wonder?

  • 22 Greg Atkinson // Feb 9, 2013 at 9:11 am

    Seems the RBA has recently become a little bearish about the outlook for the Australian economy although they still appear obsessed with China and seem to believe the economy there has stabilised. I may be in the minority but I still believe the Chinese economy is heading for a hard landing.

  • 23 Matthew // Feb 9, 2013 at 11:10 pm

    Greg, I don’t know how much time you spend in China, but if you spend much you can often read an economy by your eyes and yours ears.

    By this I mean when you travel to a city or country that is struggling, you see and feel it.

    I get that when I am in Europe and South Africa, but not in China. This place is buzzing with activity and optimism, communism and westernization are melting together perfectly.

    They are regulating areas such as population, housing and income admirably while introducing urbanization.

    Every time I hit the Mainland i am amazed by the growth in consumerism. Might be a hard landing off the current, but it will be a long way up on even last years baseline

  • 24 Greg Atkinson // Feb 12, 2013 at 10:55 am

    Matthew I get over to China when business takes me there, it’s just an hour away by plane from where I am in Japan.

    I don’t get the same rosy picture of China and have seen plenty of evidence of over capacity & over building. But I have written before about this under the China tag so I will leave it at that.

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