Like most stock market investors I will end the year well and truly bruised. Although I wrote earlier in the year that 2008 would not be a good for Australian shares, I have to admit I did not think it was going to be this bad. Therefore I am hesitant to make any comments regarding the Australian stock market in 2009 as I am sure to find little turns out as I expect. However just as Nigel Tufnel was able to rise above substandard catering on the Spinal Tap Tour, I am going to rise above the current carnage and outline what I think will happen as next year unfolds.
If you have no idea what I am talking about regarding the substandard catering, then let Nigel Tufnel explain the situation in his own words:
Funnily enough, this clip form the movie “Spinal Tap” pretty much sums up what happened on the Australian stock market in 2008 as well.
Now on to a few planning assumptions for 2009. As readers of this blog will know, I am not a fan of the emissions trading scheme and I am also a long time global warming skeptic. (Global warming: do your own research) Therefore I am pleased that many in the media and even some politicians are finally questioning the science behind the currently embraced global warming theory.
Next year as the economy falters and Australia finds itself in a recession we could have avoided, I am betting we will see a further watering down of the emissions trading scheme, while at the same time we see an increasing use of renewable energy. These developments should help out alternative energy related stocks and give some of the more polluting industries a bit of breathing space. (please note the attempt at humour)
We are also likely to see next year the start of some big government spending on infrastructure so that should help the out numerous construction and engineering related companies. I am not sure these projects will help raise the share prices of these companies but rather put some support underneath existing stock prices. After all, doing business with governments in Australia can be risky business as some companies have found out in NSW for example.
Oil prices will been keenly watched next year (as they are now) as a rising price will be seen as an indicator that demand is possibly picking up and thus pointing to a recovery in the global economy. An oil price between $50-$80 USD a barrel would seem a reasonable trading range in 2009 and I would guess OPEC will keep cutting production until they can get somewhere near that price. It might seem good that we have low oil prices at the moment but actually it will cause the global economy problems later as many oil projects will be shelved and we will get hooked on oil yet again.
The best thing for all us is a continued push to seek alternative fuels (such as biofuels) and I worry that cheap oil might kill off funding into many alternative fuel projects. (and deliver us back into the hands of OPEC) In any case I will be hedging my bets and be looking at picking up oil company stocks and shares in companies associated with biofulels etc. By the way, I suggest if anyone wants to get some good background on oil prices etc. that they read this interesting forum discussion about Peak Demand on the Gavekal website.
I am not expecting the Australian economy to be one of the great global performers next year or even in 2010. Just as Australia rode the commodities boom all the way to the top so we will have to ride out a few quiet years and pay for some excesses we enjoyed in the good years. After Rudd’s cash handouts fade into memory early next year there does not seem to be much on the horizon that would make people want to keep shopping.
Imported goods are going to be more expensive due to the weakness of the Australian dollar, unemployment will rise and generally by the time the Reserve Bank decides to cut interest rates again it will be common knowledge that Australia is in a recession. The Reserve bank might surprise me and cut short their holiday break to cut rates in January, but if they don’t we should be calling for their heads. (I cannot believe they are even thinking of not meeting in January…talk about fiddling while Rome burns!)
Overall I think it is safe to say that next year will not be a year of rampant growth in the global economy and all our major trading partners will be busy trying to prop up their economies. I am sure if we sent the Hobbit to see the wizard he would come back and tell the government to support business and to use 2009 as a time to make the Australian economy more efficient. Maybe getting a “true” broadband network rolled out would be a good start, but that seems beyond the capability of Australia so far. No wonder we are not known as a high tech economy!
So what is the outlook for the Australian stock market in 2009? Well in my humble opinion I think we should all be prepared for tough year. The downturn in the economy is just starting to hurt and next year further economic pain will be felt across the nation. Companies will fail, people will sadly lose their jobs and although the stock market might start to see a recovery in sight sometime during the year, I would be very surprised if we saw the All Ordinaries finish 2009 (All Ords) much over 5000.
I also expect the Australian economy to lag behind the economies of our major trading partners simply because we need their demand for our products to get ourselves going again. During 2007 I actually starting moving out of Australian domestic play stocks and into the stocks of Australian companies, trusts etc. that has significant international exposure. Of course this shift done nothing to help me in 2008 but being an optimist I am hoping this strategy pays off in 2009-2010.
Now for some final and words of wisdom(?) that I hope will put investor’s minds at ease.
1. Do not beat yourself up about the stock you should have sold at the top of the market in 2007, or the stock should have purchased instead of that other stock etc. Even the experts got wiped out this year…although many of them are still promoting themselves as experts!
2. The average long term return from Australian stocks is around 10%. Over the previous few years we have been seeing returns well above the long term average so in a cruel way the market is just cutting us down to size. We will see double digit stock market returns again; this is not the end of capitalism. (and there will be another market bubble at some point as well!)
3. Many people who are writing about how they wisely predicted the current crisis have been predicting a crisis for years. Making open ended predictions is easy..here is one from me; we will see a return to bull market conditions within the next few years. Now can someone call me in a few years time if I am right and anoint me as a stock market legend? If I am wrong, do not bother calling.
Finally please remember that any attempt to predict what the market will do in the future is at best an educated guess. What I have outlined above is based on assumptions and estimates that could turn out to be very wrong, so please as always, do your own research and tread carefully.