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.”
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?