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Australian stock market outlook for 2010.

December 27th, 2009 · Greg Atkinson · 36 Comments

As the end of the year approaches it is time once again to contemplate how stocks may perform over the next 12 months. There are plenty of views around of course that range from the super bearish (i.e. there will be another stock market crash) to super bullish, (i.e. markets will surge to dizzying new heights) but I will steer clear of both extremes. So at the risk of being very wrong, very soon, let me now underwhelm you with my outlook for the Australian share market in 2010.

Firstly let me say that I quite openly admit when I mess up my attempts to predict where the economy and stock market is heading, however I would like to claim some credit if I may for my 2009 stock market forecast which I made back in December 2008 as follows:

“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.”

(Source: Australian stock market outlook for 2009.)

So although I may be just be a humble blogger, my attempt to guess where the market was heading last year is looking pretty much on the money at this stage. Remember that when I wrote this, most in the financial media were out selling fear and panic.

In December 2008 Lehman Brothers had collapsed just a few months beforehand, the world financial markets were a mess (remember when everyone talked about LIBOR?) and Dan Denning, Bill Bonner and others over at the Daily Reckoning were predicting the next Great Depression.

But alas as I kept saying even when the stock market kept falling, a bottom will be reached at some point and the markets will recover. They always do, eventually. Capitalism was not falling into a heap, it was simply deflating a massive bubble created by people who were suppose to know how to manage the financial markets.

So here we are now, the Australian ASX All Ordinaries & S&P/ASX 200 both reached a multi-year bottom in March and I believe we won’t be seeing the market below 3500 again for many years. (if ever) In my view we are now in the early stages of the next long term bull market and that when we look back at the charts late next year we will see a clear but gradual, upwards trend that started in March 2009.

However I don’t believe that 2010 will be a year that we will see spectacular stock market gains as I expect that commodities prices and commodities related stocks like BHP, RIO will come under pressure as the construction frenzy in China starts to ease.

In addition, higher interest rates in Australia will take money out of peoples pocket’s and that means consumer spending may be soft. I would also expect oil prices to break above $80 USD a barrel and think a trading range of say between $80 – 100 USD a barrel seems pretty reasonable for 2010.

Oil is perhaps something a lot of investors have taken their eyes off in 2009 since gold seems to have caught everyone’s attention. But I am confident oil will come back in a big way over the next few years. The U.N might be focused on climate change, but when they conduct their pointless meetings like the one in Copenhagen recently, most people flew in on good old oil burning jets.

Probably the only thing achieved by the COP15 conference was that the airlines and the Copenhagen economy received an early Christmas present. But I digress.

As oil prices head up next year inflation in Australia will also edge upwards assisted by higher prices for electricity, water etc. To try and keep a lid on inflation the RBA will creep up interest rates further and so Rudd’s Christmas cash handout late last year will soon be consumed by higher mortgage payments, petrol prices and utilities bills.

Many people will tell you that a good hedge against inflation is gold. Personally that does not make much sense to me and I would suggest a better hedge against inflation is to invest in oil or energy stocks.

Overall I suspect 2010 will be a year of recovery. Stability will return to the worlds financial markets, global trade will start to expand again and the fear that has gripped investors over the last couple of years will subside.

In Australia although the economy will continue to struggle the stock market will get a boost from a higher Dow Jones and signs that the U.S. economy is slowly shaking off it’s worst recession in 50 years. Remember that generally speaking stock markets lead the real economy, so although I don’t expect the Australian economy to be doing great next year, investors will by the end of 2010 be buying into the 2011 growth story.

Therefore as next year draws to a close, I am working on the assumption at this stage that stocks will be just above 5500 but below 6000 and therefore 5750 will be my guesstimate (stock market forecast) of where the ASX All Ords & S&P/ASX 200 will close at the end of 2010.

This would mean that if the ASX All Ords finishes this year somewhere around 4800 then next year a well balanced portfolio may be looking at a gain or around 20%. This might seem like a great return, but the fact is that for many investors it will simply be a year of making up some of the losses taken during 2008-2009.

My feeling at this stage is that if my Australian stock market forecast turns out to be wrong for 2010 then it will be because I was too conservative. In other words, despite my warnings about the weakness of the Australian economy I still believe that the current stock market rally has plenty more upside potential.

So by December 2010 I will either be ducking for cover and wishing I had never written this post, or be claiming that I have made two correct stock market forecasts in a row. Anyone care to guess which outcome is the most likely?


36 responses so far ↓

  • 1 pat // Dec 30, 2009 at 8:21 pm

    things will be rosey unless iran gets out of hand and china hits the wall like japan did in 1990.

  • 2 Jack // Feb 14, 2010 at 4:30 am

    The world is ending.

  • 3 Ned S // Feb 14, 2010 at 1:59 pm

    It does seem that some changes are coming our way. With no guarantees that all of us are going to like them.

    Some sort of combination of being “nimble and quick” and saying “such is life” may be the go? ๐Ÿ™‚

  • 4 Greg Atkinson // Feb 14, 2010 at 3:59 pm

    We have plenty of worries on the geopolitical front that is for sure from the Middle East to North Korea and the tensions between India & Pakistan.

    On the economic side of things what worries me the most is the Chinese economy (i.e. is it just growing or already in a bubble?) and the strength of the U.S recovery.

    But it does look like the worst of the GFC is behind us and maybe we won’t see another crisis like that for 20 years or more?

  • 5 Lloyd // Oct 21, 2010 at 2:21 pm

    So, how confident are you now?

  • 6 Greg Atkinson // Oct 23, 2010 at 7:13 am

    Lloyd I reckon my forecasts back in December 2009 is not looking too bad and the market may end the year pretty close to the level I predicted.

    This year the fear in the market has subsided and I would say investors are cautious rather than being in a near state of shock as they were in 2008 and parts of 2009.

    So I feel I did fairly well at reading the tea leaves back in December last year but I would have to say that I don’t think next year is going to be as good for the Australian stock market.

  • 7 Biker // Oct 23, 2010 at 1:03 pm

    5750 was an ambitious punt and I think we’ll close 2010 around where we are right now, Greg. I’ll be delighted to be wrong about that, BTW!

    Why do you think ’11 is a concern? Yes, there are some big, unresolved issues here and abroad, but confidence levels seem very high in WA right now.

    Apart from mining taxes, etc, is your primary ‘geographic’ concern China, the PIIGS, or the US? (Or, all the above? ๐Ÿ˜‰ )

  • 8 Lloyd // Nov 1, 2010 at 11:20 am

    Apologies, I was just stirring with previous comment and I admit it was a cheap shot.

    I personally believe the Aussie market will be far lower than existing levels due to high total worldwide private debt levels (falling in virtually every OECD country except Australia and Canada), fiscal austerity measures in every developed country, therefore resulting in shrinking total demand even if we assume Chinese demand rises.

    However, I doubt Chinese demand will rise because export makes up at least 25% of GDP, wealth is concentrated, wealth is also expressed in empty houses (as interest on bank deposits are low) and the majority of the population do not have sufficient incomes to generate meaningful consumption demand.

    Therefore, there is no way out of the debt and deflation trap because we are in a liquidity trap. I agree with Hyman Minsky and Richard Koo.

  • 9 Senator13 // Nov 1, 2010 at 4:33 pm

    Melbourne cup rate hike?

  • 10 Greg Atkinson // Nov 1, 2010 at 5:31 pm

    Biker, I think 2011 is a worry because the impact of the stimulus measures in Europe and the U.S will be wearing off and maybe China will even try to keep cooling it’s economy. The economy in Japan also looks like having a tough 2011.

    I don’t place a lot of merit on the economic data we are seeing now because most G-20 governments have been artificially propping up their GDP which is hardly that difficult to do if you are willing to borrow and spend.

    The global economy was always going to bounce off a bottom, but I reckon we have some more hard years in front of us and somewhere ahead is a recession in China. I don’t know when a recession in China will take place, but it is out there somewhere.

  • 11 Lloyd // Nov 1, 2010 at 6:11 pm

    Dear Senator13, rate hike would not make sense as loan growth for personal, business and mortgage are all flat lined, meaning zero growth. It appears that loan growth is in fact falling. A rate hike would make this worse.

    I suspect if the RBA did nothing, house prices will just keep falling. Credit growth would also keep falling and bank profitability will be affected, hence muted share price response to record bank profits.

    Therefore, the RBA being a conservative institution will hold off on a rate hike because they would have seen flat lining credit growth.

    Just my two cents.

  • 12 Ned S // Nov 1, 2010 at 6:28 pm

    I’ll go with the consensus view this time Senator – I didn’t figure a rate rise made sense last month and still don’t?

  • 13 Senator13 // Nov 2, 2010 at 12:42 pm

    Rate rise shock – http://www.smh.com.au/business/rate-rise-shock-20101102-17bsg.html

  • 14 Lloyd // Nov 2, 2010 at 12:55 pm

    Haha. I’m proven wrong yet again. Fantastic. As the RBA is raising rates despite falling credit growth, this doesn’t look too good for the housing market. I suspect bank profitability will be deteriorating in the near future.

    Wow, they must really believe in their own story about China’s industrialisation and the 2nd coming of the “Mining Boom”. Boom,boom!!! That is the sound of the Australian economy taking a pounding.

    I must admit, I’m very, very surprised. Either they know something we all don’t about the economy or they are really serious about popping the housing bubble. Oh well.

  • 15 Ned S // Nov 2, 2010 at 1:04 pm

    You called it Senator! I agree with Lloyd’s comment above.

    I’m damn surprised actually. One thought that flicks through my mind is that they reckoned the banks would go without them if necessary and figured no-one needed the aggro or embarrassment?

    It seems like a gutsy call though.

  • 16 Senator13 // Nov 2, 2010 at 1:19 pm

    I wish it was not the case. I agree with Loyd too – it seems an odd time to put them up.

    And just a pain for me – I was making good progress on the loan lol.

    I am not surprised however. They do have a history of following through with their rhetoric. Not that I agree with it.

    The stock market over the last few weeks has gone up – but overall I would say this year has been pretty sideways on that front…

    I doubt small business would think it is a good time to put them up either with Christmas just around the corner.

    And as discussed elsewhere housing is going a little sideways at the moment too.

    I suspect some of the banks might try and go above and beyond again too.

  • 17 Ned S // Nov 2, 2010 at 1:26 pm

    “I doubt small business would think it is a good time to put them up either with Christmas just around the corner” – God no; There’s going to be some very unhappy Santa’s little helpers out there in Retailland.

    Looking forward to reading Greg’s take on it.

  • 18 Greg Atkinson // Nov 2, 2010 at 1:55 pm

    Ned, I am not sure I can make any sense out of the RBA these days. I fail to see how raising rates now will help curb inflation unless they are trying to wipe out small businesses as part of their cunning inflation fighting plan. The Government and RBA seem to be pulling the economy in different directions.

    Listed companies have been issuing profit downgrades one after another recently (expect banks) and even BHP has been a little gloomy of late. So maybe the RBA board need to check what is in their water cooler?

    The stock market is still stuck below 5000…one wonders if it will even get above that mark for any extended period of time next year?

  • 19 Ned S // Nov 2, 2010 at 1:55 pm

    CBA has increased their variable mortgage rate 45 pips.

    http://www.businessspectator.com.au/bs.nsf/Article/CBA-lifts-rates-by-45bps-pd20101102-AT7E3?OpenDocument&src=hp3

    That should draw some attention and comment.

    Tricked if I know Greg, maybe they just want people to stop building houses and head over to WA and work on mining industry construction. It’s just an out and out strange result for mine.

  • 20 Senator13 // Nov 2, 2010 at 2:08 pm

    Wow that was quick – they did not mess around. Maybe they think they need to do it under the cover of the Melbourne Cup?? I suspect the others will follow.

    Greg is right about the profit downgrades – it just does not feel like the booming economy in need of raising interest rates at the moment.

    You do have to wonder if the RBA are living in the same world as the rest of us… This has the feel of the “one too many” which the RBA is renowned for.

  • 21 GoWest // Nov 2, 2010 at 4:34 pm

    You only have to look at CBA shares to see why Norris is raising interest rates – He is a New Zealander who was in charge of a bank that was taken over by CBA so I can understand why he is foolish.
    Andrew Bolt’s blog has an explanation under “Why Hockey is right” of why the market, govt and RBA are warning CBA not to act like mavericks in this post GFC time.
    It will be interesting to see if they lose their government guarantee!

  • 22 Ned S // Nov 2, 2010 at 5:12 pm

    And what might I ask are the rest of us (as in non WA types) supposed to make of this? :

    http://www.abc.net.au/news/stories/2010/11/02/3055203.htm?section=business

    Effectively the WA Premier reckons his state economy is OK so he’d appreciate it if the banks lend there. Hmmm … ๐Ÿ˜€

    I gather the RBA reckons the economy is going to heat up in 2011. So considers this a somewhat preemptive strike?

  • 23 Ned S // Nov 3, 2010 at 1:58 pm

    The RBA is talking in terms of a “large expansionary shock” – Strong wording indeed I’d say! Liked Greg’s comment about checking what is in their water cooler … At this point I’m just hoping their actions don’t contribute to a “large contractionary shock”.

    Though they presumably do know way more than a few bloggers who read a few reports on various financial matters occasionally.

  • 24 Senator13 // Nov 3, 2010 at 4:49 pm

    You would hope so, Ned!

  • 25 Greg Atkinson // Nov 3, 2010 at 7:27 pm

    Ned I hope the RBA know what they are doing as well, but let’s not forget they never spotted the GFC coming and were raising rates back in 2008 when they should have been sitting on their hands. The RBA may reckon their track record is good, but I think they were lucky China jumped in and started spending big which in turn effectively covered their backs.

  • 26 Ned S // Nov 3, 2010 at 10:12 pm

    Never for even one moment does it leave my mind how badly the RBA missed the GFC Greg – Truth be told we should have had interest rates at about 10% in 2006 maybe? But that’s wisdom in hindsight perhaps.

    I agree about China’s stimulus. With the same not having been done for Oz’s benefit obviously.

    Seems that destroy the value of fiat currency remains the ‘go’ though. With the likes of even China having no real response but to manipulate their currency also.

    The thought flicks through my mind as to at what point just might the BRICs collude to gang up on USD declines? I’d say we are just maybe getting closish? But perhaps they simply don’t have the pull?

    I’m all at sea I must admit.

  • 27 Vince L // Nov 4, 2010 at 7:30 am

    Well the stock market may crawl to near 5000 by the end of the year but I guess you have given up on much more than that Greg? Your call on the oil price looks good though.

  • 28 Biker // Nov 4, 2010 at 11:11 am

    “…letโ€™s not forget they never spotted the GFC coming and were raising rates back in 2008 when they should have been sitting on their hands…”

    Well, they really _had_ to raise rates this time, otherwise we’d all be wondering what they are there for, right? Can’t have an economy humming along without some economists tweaking the controls and making engine noises… ! ๐Ÿ˜‰

    Seriously, it’s a silly call, but it works for us. ๐Ÿ˜€

  • 29 Greg Atkinson // Nov 4, 2010 at 12:12 pm

    Biker – I wonder if the RBA is trying to cool the housing market and correct an imbalance in the economy before it becomes a problem?

  • 30 Biker // Nov 4, 2010 at 2:57 pm

    “I wonder if the RBA is trying to cool the housing market..(?)”

    Possibly… and using the shortest, bluntest tool in the shed.
    Consider the fallout:

    * Australia’s third largest industry, construction, fails…

    * …precipitating a major housing shortage… and

    * … increasing unemployment… and

    * …reducing the tax base… while

    * …increasing welfare.

    A falling housing supply suggests:

    * increased rents… and

    * …rising housing costs.

    As I inferred, all this works for us. Our offsets insulate us from any pain and Stevens is about as clever as Swan. ๐Ÿ˜€

  • 31 Ned S // Nov 4, 2010 at 6:24 pm

    “Stevens is about as clever as Swan” – I couldn’t let THAT pass without comment … I think you are being rather unkind to Stevens mate! Even my neighbour’s pooch that yaps a lot is smarter than Swanny surely? Oh, I get it … You were just trying to REALLY emphathise how strange the RBA’s last move seemed maybe??? ๐Ÿ™‚

    Pic of Wayne executing all his vast intellectual property follows:

    http://www.google.com.au/imgres?imgurl=http://www.smh.com.au/ffximage/2008/02/09/wayne_swan_wideweb__470x350,2.jpg&imgrefurl=http://www.smh.com.au/news/national/treasurer-to-hold-lenders-to-account/2008/02/09/1202234226883.html&h=350&w=470&sz=28&tbnid=3HcEX86L6kf95M:&tbnh=96&tbnw=129&prev=/images%3Fq%3Dwayne%2Bswan%2Bpic&zoom=1&q=wayne+swan+pic&hl=en&usg=__01KWJFBbEi6wJgwWXBGY7CcQk-A=&sa=X&ei=MHvSTOfIC4yKvQOxwMTBDw&ved=0CCIQ9QEwAA

    Google ‘wayne swan pic’ for lots more that inspire no more confidence. ๐Ÿ™

  • 32 Biker // Nov 4, 2010 at 7:39 pm

    HaHa… Love it!

    Must confess I have little confidence in those we entrust with leadership, mate.

    Yes, it was a strange move, but as Greg notes, it may have been intended to cool off the property market. That’s OK with us, but we’re (all) pretty lucky to be where we are. I note that the World Bank has just given China the Big(ger) Tick!~

  • 33 Greg Atkinson // Nov 4, 2010 at 8:02 pm

    I see even Craig “running with the bulls” James from Commsec reckons the RBA might be misreading the tea leaves:

    From an article today:

    “….the economy is not as robust as what the Reserve Bank feels and it clearly has to reduce future expectations for rate hikes in 2011” Mr James said.

    See: Soft retail data shows cracks in economy’s strength

  • 34 Ned S // Nov 4, 2010 at 8:16 pm

    The ‘hattens are still batched down’ here blokes!

    I figure I’ll poke my head up again in maybe 6 or 7 more months time and have another look around then?

  • 35 Greg Atkinson // Nov 4, 2010 at 8:40 pm

    Ned I reckon you might be right. I am pretty much doing nothing at the moment, just waiting and watching.

  • 36 Biker // Nov 4, 2010 at 8:46 pm

    We’re all in the same boat then!~ Finished the last house over six months ago and we haven’t seriously considered the next one since. Instead, we’ve committed the funds into offsets.

    If WA does take off next year, all hell will break loose. Maybe we _should_ be considering reducing rental leases from twelve to six months, as both our agents suggest!~ ๐Ÿ˜€

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