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Australian stock market outlook for 2011

January 4th, 2011 · Greg Atkinson · 26 Comments

As another year starts it’s time for me to make another stock market forecast, one which I will probably regret making in just a few months time. Generally speaking, I expect that 2011 is not going to be particularly kind to the Australian economy and therefore my Australian stock market forecast is not going to make market bulls very happy.

But that doesn’t mean investors will not be able to make money by investing in stocks, but I suspect our nerves will be tested as the year unfolds and that for long term investors like myself, dividends may be the major source of income as opposed to capital gains.

Firstly let’s quickly look back at some of my forecasts for 2010 so that readers can judge if I make any sense at all. Not many finance and market commentators like to reflect on what they have predicted in the past but I believe that having some egg on my faces is valuable feedback. I don’t pretend to be a market wizard.

In late December 2009 when I penned my Australian stock market outlook for 2010 my general mood could be summed up as cautious and I wrote:

“…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.”

During 2010 commodities prices did come under pressure but rebounded strongly. Mining stocks like BHP and RIO did dip although their stock prices were adversely affected by the Rudd/Swan/Gillard mining tax debacle.

Oil finished the year trading around $90 USD a barrel, the stock market ended flat, retail sales were down, interest rate went up, and so generally speaking I reckon I made some pretty good calls.

But my forecast regarding at which level the stock market finish trading in 2010 turned out to be quite a way off the mark. I was expecting the ASX All Ordinaries and S&P ASX 200 to finish around 5750 whereas they both finished down around 4900. Ouch!

In my defence I will argue that the mining tax and Australian federal election outcome probably shaved 500 points or more off the market so taking that in account I was not that far off the money. But to be honest I was surprised by how little stocks rallied in 2010, this suggests the economy may be weaker than I expected.

Later in 2010 I did revise my outlook and realised we would be lucky to close above 5000 so this prevented me getting carried away with any notion that 2010 was going to be a good year for stocks.

So here we are at the start of 2011 and the ASX All Ords & ASX 200 are both trading around 4900 which suggests to me investors have not bought in the 2011 recovery story as yet.

More worrying is that many of the developments that could lead to an Australian recession in 2011 as per my post What might an Australian economic slump look like? look like they might end up becoming major problems this year and if the Chinese economy slows further, then I reckon Australia will enter a period of recession during 2011/2012.

Rather than sit on the fence or make a vague prediction for 2011 (which is probably the wise thing to do) I will stick my neck out yet again and say I expect the ASX All Ordinaries, S&P/ASX 200 to close within the 4800 – 5200 range at the end of 2011.

The reason that I don’t expect the Australian stock market to fall much below 4800 is because it did not rise in 2010 and is still way below the peak of 2007. There isn’t much heat in stocks at the moment and I doubt there will be a surge of funds towards stocks for some time yet.

I actually find myself becoming increasingly bearish about the Australian economy and stock market in general since as a nation, we seem to have become over confident and don’t realise that we are essentially relying on commodities prices remaining strong to support our standard of living and pay down national debt.

As I have mentioned many times, Australia does not seem to have an economic strategy plan B. The Government, Reserve Bank, Treasury etc. all appear to believe that the future is so bright that we will all need to wear shades. I hope they are right, because they have effectively bet the farm (and a quite few mines) on that rosy view.

During 2011 I believe we will see people scrambling to downgrade forecasts next year and my expectation is that interest rates will be on the way down at some point during the year. (or I might be scambling up upgrade my forecast!)

As for gold, I still remain cautious since I reckon it is in bubble territory and feel oil is a better investment option. I am looking for an oil price in the range of USD $100 – $120 at the end of 2011.

Anyway that is my market forecast for 2011. As always I welcome feedback, alternative forecasts and comments etc. Perhaps I am just becoming too pessimistic and missing the big picture?

Maybe the Chinese economy will keep growing strongly and the Australian economy will boom for a decade or more? Perhaps the stock market will break through 6000 in 2011?

Finally please remember that as always, I am not suggesting that anyone should invest on the basis of my ramblings as I have been wrong before and will undoubtedly be wrong again. I suggest all investors read widely and seek professional financial advice if needed before making any investment related decisions.

26 responses so far ↓

  • 1 Vince. L // Jan 8, 2011 at 12:27 pm

    A call of over 5500 seemed pretty reasonable for much of 2010. But don’t worry Greg you are still doing much better than Steve Keen as his property price predictions!

  • 2 Greg Atkinson // Jan 8, 2011 at 1:43 pm

    Thanks Vince, you are too kind. Even if I take 500 points off for the mining tax and political mess it sill leaves me short. I did revise down my forecast during the year but I have to say I was surprised that didn’t see the ASX All Ords/ASX 200 close just above 5000. Maybe the GFC has pushed people towards housing as an investment in Australia and if so, is that a good thing I wonder?

  • 3 Firebug // Jan 10, 2011 at 6:13 pm

    Credit Suisse tips sharp GDP fall in 2011

    Is mainstream beginning to catch up?

  • 4 Greg Atkinson // Jan 11, 2011 at 9:49 am

    Firebug I would like a few other people talking about a slowdown in Australia as I am feeling a touch lonely here πŸ™‚ I think the mainstream media are simply out of their depth these days when it come to reporting on the economy..some of the rubbish pumped out by the newspapers is truly amazing!

  • 5 Firebug // Jan 11, 2011 at 10:32 am

    Happy New year Greg

    I know what you mean re newspaper columnists. Ross Gitten seems to be one of the more deluded ones.

    My company is really struggling with both sales and profit at the moment. We put on a lot of people post GFC, but the sales didn’t lift much at all.

    People I have spoken to largely share the same view re the economy that the strength just isn’t there for them to see it.

    Have you noticed the small gap between the banks’ current variable and fixed loan rates? If the rates are really going to go up further, why the banks aren’t protecting themselves? Something isn’t adding up.

  • 6 Greg Atkinson // Jan 11, 2011 at 12:20 pm

    Thanks FB. I think you comment reflects how it really is out there. Gerry Harvey for example has gone from saying the Harvey Normal was going to do well to crying poor over people buying shoes online.

    I don’t hear many company CEO’s (apart from say the miners) talking about how great business conditions are and the stock market is certainly not rallying on the back of investor confidence in the economy.

    Your point about interest rates is an excellent one. Maybe the banks can see that higher rates really biting?

    My biggest worry is that the China growth story seems to have most people thinking that the Australian economy is “bullet proof”. Maybe it is, but I doubt it. As I have said a few times, the Australian economy looks very unbalanced to me and could easily tip into recession.

  • 7 Biker // Jan 13, 2011 at 5:05 pm

    Well, I doubted your 2010 stock prediction, as you know, Greg.*
    Now I think you’re being a little too _conservative_ this year.

    We’re getting strong offers on two properties, right now.
    We expect capital gains of 27% and 40%. Trying to figure out the whys and wherefores of this… . Low unemployment (4.4%) maybe?
    FHBGs perhaps… yet there’s still no announcement. Leaked maybe?

    We see the next two years as dynamic… and for us, exciting.
    After nearly three years of property plateau, there’s a buzz of energy happening in our primary investment suburb. The really good stuff went (albeit slowly) during 2009 – 2010… and we’re holding some quality land and housing.

    * This from a fella who bought back in at 3240 and bailed at 3800! Me a bear? Nahhhh… .

  • 8 Biker // Jan 14, 2011 at 8:36 pm

    And here’s Craig James’ view:

    Of course he would say that, wouldn’t he?!~

    Even more sure now that the WA Gov’t’s FHOG has been leaked and the interest we’re experiencing is from young’ns hoping to beat the announcement. Asking for a 10% deposit this weekend… .

  • 9 Greg Atkinson // Jan 14, 2011 at 10:26 pm

    I note that like all “experts” he fails to reflect on his past predictions. I wonder why that it is?

    It’s easy to keep making rolling forecasts without ever mentioning past performance πŸ™‚

  • 10 Vince. L // Jan 19, 2011 at 2:24 pm

    Biker your first comment about the 2010 stock market outlook was in Oct 2010. If you are going to make a call that late in the year then it’s hard to be wrong! πŸ™‚

  • 11 Biker // Jan 19, 2011 at 4:35 pm

    My first ‘comment’ was FAR earlier than that, Vince.
    Sure Greg will recall that we bought back in at 3240
    and bailed at 3800!

    Greg was quite (rightly) amused at my lack of confidence,
    at the time! πŸ˜€

  • 12 Terry, Australia // Jan 20, 2011 at 12:00 pm

    What strikes me is a consistant pattern that All Ords fall January to March. Whats the logic behind this? ie
    2010 down 11%
    2009 down 12%
    2008 down 12%
    2007, 2006, 2004 up 5%
    2005 down 4%
    2003 down 6%
    2002 down 1%

    Appreciate comments

  • 13 Greg Atkinson // Jan 20, 2011 at 1:54 pm

    Interesting point Terry. I will have a look at some charts and see what I can work out. Maybe some other people will have some ideas/theories etc?

  • 14 Senator13 // Jan 21, 2011 at 1:19 pm

    Could be the algorithmic trading bots in action…?

  • 15 Terry, Australia // Jan 21, 2011 at 7:52 pm

    Greg,it looks like your 2011 forecast may be spot on, maybe coming in at the lower end of your range. SPI 200 futures (settlements)today (21st January):

    March 4770
    June 4792
    Sept 4783
    Dec 4806

    Re my previous comment & above info, perhaps for next year, you should try for quarterly forecasts!

  • 16 Greg Atkinson // Jan 23, 2011 at 9:23 am

    Terry thanks for that. Actually quarterly forecasts make more sense and in reality my forecast changes probably monthly.

    I use my annual market guesstimate to get some thoughts together rather than as an attempt to pretend I have much of an idea of how the year will unfold. But I will take your suggestion partly on-board and start to write a mid year update.

  • 17 Steve Sydney // Feb 1, 2011 at 11:22 am

    I understand that a major factor propping up share prices is the monthly flood of super annuation money. If shares aren’t rising, where is the ‘super flood’ going ?

    Many peoples’ super got whacked badly during 2009. Could it be that a lot of people changed their investment mix away from shares ?

    Is it possible to get info from the super funds to see if the overall investment mix has changed away from shares since 2009 ?

  • 18 Biker Pete // Feb 1, 2011 at 6:01 pm

    “Could it be that a lot of people changed their investment mix away from shares ?”

    Good question.

    We move(d) ours back and forward from 100% shares to 100% cash; cash to shares; etc, etc. A friend my age followed suit.

    I suspect many in the 55 – 65 age group are now in cash, level-pegging with inflation in _self_-contributions, holding very large Super funds and playing a very defensive game as pay-day approaches!

  • 19 Greg Atkinson // Feb 1, 2011 at 8:49 pm

    Might also be interesting to see if there has been a shift out of Australian shares into say US or Asian stocks for example.

    I also think Biker has raised a good point in that plenty of money has probably shifted into cash and maybe to a lesser extent bonds. Money in the bank at current term deposit rates must give many people a nice warm and fuzzy feeling.

  • 20 Biker Pete // Feb 3, 2011 at 8:04 am

    “Money in the bank at current term deposit rates must give many people a nice warm and fuzzy feeling.”

    More an increased comfort factor in a world of volatility, Greg.
    VERY poor tax write-offs, unless you’re sal-packed, though.

    My kids are doing very well with their Indexed Funds strategies.
    Hope it lasts!

    _Totally_ blocked at DRA, Ned. Seems they didn’t appreciate the round of serves I/we gave their poster boy!~ It was getting monotonous and pretty boring, anyway… πŸ˜€

  • 21 Wijitha // Apr 12, 2011 at 8:56 am

    Thanks Greg for your insights. It is no wonder that RBA and the government is sitting on fairyland. I think they know it through but all this economy is very fragile and unfortunately depends on perceptions than the real facts. We are very fragile till uncle sam really comes out and that looks like going to take at least next decade to happen. My worry is the shares have lost about $50k from 2007 and got retrenched late 2008. I have not been able to get a permanent job since then therefore what to do this year. I will gladly retire if I had the 2007 money but that now it has reached 5000 mark again whether to cut and run or hope and wait for 5300 area before that cut and run. Thanks again your comments were helpful.

  • 22 Greg Atkinson // Apr 12, 2011 at 4:00 pm

    Hi Wijitha I am glad you find my ramblings of some use πŸ™‚ At times I am quite optimistic but then at other times I become quite concerned about the direction of the Australian economy.

    Let me give you an example of what I mean. At the moment I am in China in one of the regional cities. Across from my hotel is a modern office building about 25 stories high. It’s a few years old and yet I can’t see many people working in it and at night few lights are on. In fact when I look at all the recently built office towers here I see very few lights on at night.

    Maybe everyone finishes work early? But it looks quite possible that there is a lot of vacant office space here which makes me wonder if it’s possible for the pace of construction in China to keep going as it is.

    But if I listen to the big miners, the Government and the RBA then what I hear is the mining boon will last for decades. So what is the true story?

    Personally I put more weight on what I see on the ground and hear from business people here in the Asia then I do from people crunching numbers from behind desks in Sydney.

    Maybe I am too cautious…time will tell. But at the moment I am simply not in a bullish mood and think 2011/2012 are going to be tougher for the Australian economy than many market analysts are suggesting.

  • 23 James. T // May 14, 2011 at 12:17 am

    Only just stumbled across this blog, great work. How things have changed in the last month, some awful days on the market during the last few weeks. I read an interview at whereby the trader being interviewed had a similar outlook.

    Hopefully this volatile time will be over soon!


  • 24 Biker // May 15, 2011 at 10:47 am

    Greg: “In fact when I look at all the recently built office towers here I see very few lights on at night.”

    Frankly, I shudder when I see huge cities like New York burning a million bucks worth of fossil fuels nightly. Perhaps the Chinese have examined the practice and decided it’s not in
    their long-term interest(?)

    We have over fifty lights which might be burning at any one time on our main property. You’ll never find more than two on at any time, unless we have guests in our chalet.*

    Volatility? Why should the future be any different? πŸ™‚

    * Not counting solar lights which line our pathways and roads…

  • 25 Greg Atkinson // May 15, 2011 at 11:21 am

    Biker a quick look at Shangahi at night shows that power conservation is probably not the reason for the dimly lit buildings in Nanjing. (plus my hotel was lit up like a Christmas tree)

  • 26 Greg Atkinson // May 25, 2011 at 11:31 am

    Looks like the scramble to downgrade some forecasts has already started. Goldman Sachs has now adjusted it’s forecast to match mine πŸ˜‰

    See: Goldman Sachs slashes sharemarket December target to 5125 points

    From this article:

    “GOLDMAN Sachs has slashed its December target for the Australian stock market by 8 per cent after the global investment bank yesterday cut its 2011 growth forecast for China.

    Two weeks after Deutsche Bank cut its target for the ASX/S&P 200, Goldman today reduced its December forecast to 5125 points, from 5600, and cut its December 2012 target to 5650 points, from 6100.”

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