This year it is going to be tougher than normal to put together a forecast for the Australian stock market simply because we are in the midst of quite a nasty commodities rout. However I been warning for while that a major correction in commodities prices would hit the market so I am going to look through the current turmoil and try to see where the ASX All Ordinaries and S&P/ASX 200 may finish up at the end of the year.
For the last few years I have been cautious even at times bearish, regarding the outlook for the Australian share market and have often predicted the market would finish lower than it actually did and last year was no exception. However in my defence I have generally been spotting the longer term trends a bit better.
For example my somewhat pessimistic overall view of the market has played out over the last few years and despite some bullish calls in the mainstream finance media, the reality is that both the All Ords and ASX 200 are trading back where they were in 2006. Also I have been a commodities bear for some time and have been waving the Baltic Dry Index red flag for at least a year.
Yes it’s true I sold my holdings of BHP Billiton (ASX:BHP) before the share price peaked, but I reckon getting just over $40 a share a few years ago is better than holding them at $27 today. (For the record I am buying small parcels of BHP shares around that price or when they head lower…but this is not investment advice!)
In any case as I have mentioned before, I accepted a long time ago that my short term market predicting skills were as good as my juggling skills so I try instead to focus on long term trends. Having said that, I do still put together an annual forecasts even if I am simply trying to estimate if the market will finish up or down.
So once more I will (foolishly perhaps) set out my Australian stock market forecast for 2015 but to start with I will review a few long terms ASX charts.
S&P/ASX 200 Index (XJO) 2000-2015 Trend Chart
I like the above chart because it is fairly simple. It starts off when the XJO (ASX 200) is around 3000 points and finishes when it’s close to 5500 points at the end of 2014. It also highlights that in hindsight, how overbought the market was from say 2006 until it came crashing to earth starting from late in 2007.
Without getting too complex we can make a few observations. Firstly that over the last 15 years the ASX 200 has risen approximately 2500 points which is an average of say 160 points or so per year. (which doesn’t mean much actually). More interestingly is that the market over that period was up around 84% which gives us an average index gain each year of say around 5.6%.
Now if add dividends (say 4.5% on average across the ASX 200) you reach a figure which is close enough to call 10%. This is significant because 10% is the average long term return per year for the ASX All Ords/ASX 200 or a balanced stocks portfolio.
So from my point of view the market is close to where it should be now and we have finally put most of the excesses of the mining and commodities boom behind us as far as the stock market is concerned. As for the Australian economy, well that will probably deal with the excesses of the mining boom over the next year or so.
My biggest timing error over the last few years was that I expected the mining boom to come to an end earlier than it did. But the good thing about being a long term investor is that this means you may just miss out means buying right at the market bottom but that’s pretty hard to do anyway.
Now let’s look at another long term trend related ASX chart.
S&P/ASX 200 Index (XJO) 10 Year Trend Chart
This 10 year chart of the ASX 200 is also interesting as it starts off just before the market went into the bubble phase, which at the time most thought was the new “norm”. (i.e. the long term China growth narrative) The average gain over this 10 period is about 150 points a year and the long term gain if you add dividends is just under 10% which is not surprising.
Of course if an investor had piled into stocks right at the peak back in 2007, then it will probably be a long time before they see capital gains. But that’s always a danger when we, as investors, jump onto a trend late or into a “hot” investment area.
The key point about the chart above is that it reinforces my view that after more than 5 years, the Australian stock market has set up a base from which to gradually head towards the next market high.
Of course as I look at this chart today I wish I had been more active when the market was below 4500 but I will settle for picking up bargains or under-valued stocks at around 5000 (or lower if possible) and won’t worry too much about not picking the precise market bottom.
Now, before I make my 2015 stock market forecast there is one final chart I wish to discuss.
ASX 200, BHP Billiton, Commonwealth Bank 10 Year Gains Chart
On the chart above I have simply added share price movements of BHP Billiton (BHP) and the Commonwealth Bank (CBA) onto a 1o year chart of the ASX 200 so we can get some idea of the gains over that period.
What we can note is that even allowing for the fairly recent slump in the BHP share price that it has out-performed the ASX 100 Index over the last 10 years as has the CBA. However the CBA share price has been on the way since around mid 2011 and is still holding up very well. (and better than I expected)
I included this chart mainly to highlight that although there are risks, a few selected ASX 200 stocks can significantly outperform the broader ASX 200 Index itself, although on the flip-side this approach can also deliver the opposite result. It is also an interesting chart because it shows that quite unusually, the major banks (like CBA) and large diversified miners (like BHP) are basically moving in opposite directions. But I don’t expect that trend will still exist at the end of the year.
So if I look through the current market turmoil and factor in that the commodities selling is probably now entering the over-correction/panic phase then I would say at the end of the year I expect the Australian stock market to finish around 5600, although it may peak above that level along the way. In other words I expect the major mining stocks to recover some ground during the year and that the wave of selling across a range of commodities and commodities related stocks to settle down.
What is likely to hold the market back will be the major banks cooling off a little as property prices soften. In addition I suspect even those most bullish of Australian economic forecasters will grudgingly need to concede that the commodities boom is over and that some years of lower than trend mining investment (and royalties) lay ahead.
In short, despite the current stock market slide I expect that by the end of the year the ASX 200 will return close to the average long term trend (I.e. a 5.5% gain for the Index and 4.5% in dividend yield) plus we may finally see the market breach the 6000 level within the next couple of years.
Yes there are many risks and I’m sure there will be some corrections to test our nerves in the year ahead, but for the first time in a while I am cautiously optimistic about the outlook regarding Australian stocks.
Now over to you!
This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp