The ASX All Ordinaries Index and S&P/ASX 200 Index finished much lower than I expected in 2011, so this makes me somewhat reluctant to go on record and make an Australian stock market forecast for 2012. However the process of looking at the various economic data and trying to guess where the market will end is a useful one, so foolishly I will outline once again my Australian stock market forecast for the year ahead.
Firstly let’s cover what we know. The Eurozone is set for a tough year with many of the major economies there poised to enter a recession. The U.S. economy is still in bad shape, although there are a few bright spots in the housing and employment markets for example. In Asia the Chinese economy is slowing, the Japanese economy is struggling and in Australia the economy has been showing signs of weakness for more than a year.
A quick glance at some of the economic indicators I watch shows that the Baltic Dry Index is currently in a slump, commodities futures are still basically trending downwards as they have been since April/May 2011 and oil (WTI) is around $100 USD a barrel. (Brent Crude is trading around $113)
None of these economic indicators look particularly bullish to me. Even the gold price appears to be in somewhat of a holding pattern. It seems that the markets are waiting for something to happen and are poised to lurch upwards on downwards when something does. (as was the case for much of 2011)
The economic indicators for Australia suggest that the housing market is struggling, consumer spending is weak and export earnings might be on the decline. (as demand from China eases). On the positive side we may see the Reserve Bank cut interest rates again but I doubt that this alone will help the stock market much.
So as we start a new year I would say my short term outlook for Australian stocks is bearish. I see far more downside risks than upside potential, however I don’t expect the ASX All Ords or S&P/ASX 200 to spend much time below the 4000 level simply because I think many quality stocks are already over sold.
Yes the global economic outlook doesn’t look good at the moment, but consumers still consume, the banking system has not fallen into a heap and life goes on. Overheated economies will cool down, debt levels will gradually be brought under control and the seeds of the next market bubble will be planted…and probably already have.
Anyway for two years running now my Australian stock market forecast has been too high. Last year in my Australian stock market outlook for 2011 I anticipated that the All Ords/ASX 200 would end in a range between 4800-5200 and for a while, it looked like I had been too cautious.
But after a good start to the year the market slid back and was given a kick downwards in July because of the debt concerns in the Eurozone. The ASX All Ordinaries finished 2011 at 4111.00 and the S&P/ASX 200 at 4056.00. So quite clearly I was way off the mark and should be slapped around with a cold fish.
So this year it would make sense for me to be more cautious and although I am bearish in regards to the outlook for Australian stocks over the short term, I still believe (probably foolishly) that another bull market will take root and that this may happen this year.
Please remember that any attempt to predict where the markets will end in 12 months time is at best a semi-educated guesstimate. Quite clearly I have not been very accurate over the last few years but in my own defence I will say that at least I did spot some of the trends correctly.
So for 2012 I am expecting the Australian stock market to finish the year considerably higher with the All Ords/ASX 200 finishing between 4800-5200. Last year I was bearish when I suggested the stock market would end within that trading range, this year it’s a bullish call.
You might wonder, why am I making a bullish prediction for the Australian stock market in 2012 when I have outlined above so many reason for being bearish?
The simple answer is that most of the bad news is already factored into stock prices. A slowdown in China is priced into the mining stocks, the banks have been dragged down by the mess in Europe and stocks exposed to consumer spending are already trading at recession like levels.
In other words the Australian stock market is already in a recession and taking into account that it was once trading above 6500, one could argue that it has been in a slump now for four years. The Australian economy faces some challenges and times will be tough for a lot of companies, but the stock market is currently trading around 35% lower than the peak reached in 2007, so it seems to me an economic downturn is already priced into the market.
Many investors already have stock market fatigue. Vast sums of money have been moved away from Australian stocks and into other asset classes such as cash or precious metals. You don’t get many taxi drivers sharing their stock market tips these days, instead what you are more likely to hear are stories of people who have lost money with shares or gloomy stories about the economy.
So in my view we are close to the point of maximum pessimism in terms of stock market investor psychology.
My stock market investment strategy for 2012 therefore will be to focus on battered down blue chip stocks which have been oversold but pay good dividends. These are the type of stocks where you can earn income as you sit and wait for them to recover. It might take years before you see a decent capital gain with these shares, but the wait could be worth it.
At this point please remember that my ramblings should not be taken as any form of investment advice. I encourage all readers to visit other sites and do plenty of research as they develop their own stock market investing strategy. I simply hope my frequent blunders and occasional successes (if any) are of some use.
So I have stuck my neck out and make a call for 2012 so now I welcome as always, feedback from readers especially other outlooks or forecasts for the Australian stock market.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp