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.