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Australian Stock Market Outlook & Forecast for 2017

April 3rd, 2017 · Greg Atkinson · 11 Comments

Each year I outline how I think the Australian Stock Market might fare bearing in mind that my forecast, like all forecasts, is actually a calculated guesstimate – at best. None of us know with any certainty how the financial markets will ride out the year and it’s probably a safe assumption that anyone that implies that they do is either trying to sell you a book or website subscription. But a forecast can be a useful planning exercise even if it simply makes us think of the factors that might move the markets. So once again I will go out on a limb and add my forecast to the galaxy of other forecasts.

Usually I attempt to get my forecast together in January or February, but this year it’s been quite difficult to try and factor in developments like Brexit and Donald Trump sitting in the Oval Office. To complicate matters further there is the ongoing and seemingly never-ending debate about home prices in Australia and various geopolitical issues on the horizon to deal with. In truth we always live in somewhat uncertain times but the market outlook for 2017 appears to be a little more uncertain than in recent years. As I will discuss later, there are reasons to be optimistic about the outlook for Australian stocks this year and yet I feel the S&P/ASX 200 will struggle to hold onto the gains made during the “Trump Rally”.

On the positive side the Australian economy is still in the midst of a recession free era with the unemployment rate relatively low, growth moderate and export earnings holding up fairly well. In terms of stock market performance, the S&P/ASX 200 whilst still a laggard when compared to the Dow Jones Industrial Average (DJIA), is heading towards 6000 and many commentators believe this is just the start of a major bull market run that might even see it finally reach the pre GFC highs within 2017. Certainly if we look at the 1 year (candlestick) chart of the ASX 200 it does appear that the bulls are control.

S&P/ASX 200 Index (XJO) 1 Year Chart

S&P/ASX 200 Index 1 year Chart

Around 12 months ago the ASX 200 was below 5000 and it has since risen by 1000 points or about 20%. That’s quite a good gain if as an investor you had got the timing just right and bought on or near the low and was prepared to sell now. But if we step back and take the longer term view things look very different.

S&P/ASX 200 Index (XJO) 5 Year Chart

S&P/ASX 200 Index 10 year Chart

In the chart above the recent rise of the ASX 200 is put into some perspective. We have seen similar rallies before and yet the market is still below the pre-GFC high back in 2007 of around 6,800. This means that it’s quite likely that after 10 years the Australian stock market will still be trading at a level lower than it was trading around back in 2007. That’s not really my idea of a stellar bull run and my view is that the market is still struggling as I have written about on several occasions. That does not mean it’s not worth investing in ASX listed stocks or funds since there are certainly stocks and funds that have done very well. But I simply urge investors to be cautious and not get carried away by much of the hype and click-bait articles that dominate much of the finance media. Next let’s look at the overall long term trend for the ASX 200.

S&P/ASX 200 Index (XJO) – 1992 – 2017

ASX 200 Chart 1992 - 2017 with Trendline

I have used a long term chart of the ASX 200 before to show trend lines and trading lines as I believe it’s a useful way to keep the big picture view in our minds. For example the performance of the stock market should over the longer term correlate to some extent to how the overall economy is performing. Thus if the Australian economy is expanding we would expect the stock market to be rising along with this expansion. As shown in the chart above the overall trend for the ASX has been upwards and it appears now that it now moving upwards along a trend-line consistent to the trend before the pre-GFC/commodities boom. This is a good sign and some would say that this is an indication that the market has reverted to the mean. (I.e. mean reversion theory) Overall I’d suggest that indeed the market has settled back into a sustainable upwards trend but that doesn’t mean there will not be significant corrections coming our way.

My view of the Australian stock market at the moment is that it now primed for significant correction and by significant I mean a fall of around 10% or more. I base this call on three main factors. First that the “Trump Rally” is overdone and there is no certainty Trump will be able to deliver on his most of his promises regarding the U.S. economy. Secondly I believe the RBA is probably going to be pressured into raising interest rates lest it wants to deal with a major house prices/real estate bubble. Lastly economic growth in China has clearly slowed since the heady days around the GFC despite many “experts” saying this would not happen. As the Chinese economy continues to cool there’s likely to be some shocks along the way and the property market in China might cause some market chaos this year.

Finally let’s look at what I consider is an important market indicator and one that doesn’t get a lot of attention – the S&P/ASX Small Ordinaries Index.

S&P/ASX Small Ordinaries Index (XSO) 5 Year Chart

ASX Small Ordinaries Index 5 Year Chart

The Small Ordinaries Index (XSO) is made up of ASX listed small cap companies and is a way to view the performance of the market with the big companies effectively filtered out. I find this Index useful because it’s more sensitive to the Australian domestic economy and less influenced by for example the price of oil or by global factors that would influence the price of stocks like Rio Tinto, QBE Limited or Qantas. Looking at the chart above it’s pretty clear that the recent rally across the ASX 200 has not filtered down to the Small Ords. In fact the Small Ords Index has been moving sideways for some years and I think this more accurately reflects how the wider Australian economy is faring. Strip out home prices and resources and the Australian economy is not doing particularly well – although it has to be noted that the last recession was back in the early 1990’s.

As for my forecast for 2017 – well it would be relatively easy to make a bullish prediction for the Australian stock market this year since it’s currently still riding the Trump rally, interest rates are low and resources prices have recovered somewhat. However the underlying Australian economy appears weak and the recent rally seems overdone. Therefore I expect a signifiant correction will bring the ASX 200 down towards 5500 (or lower) during the year and that at best the Index will finish 2017 at around 5700.

Of course that’s just my forecast so I welcome readers to post their own views and for the record my forecast for last year can be found via this link: Australian Stock Market Outlook & Forecast for 2016

This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Australia but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp

11 responses so far ↓

  • 1 Geoff // Apr 4, 2017 at 5:04 pm

    Wow. “Finishing 2017 at around 5700.” Pretty depressing. Should we give up the share market and buy an investment property?

  • 2 Greg Atkinson // Apr 4, 2017 at 9:07 pm

    Geoff there are some years when the stock markets post gains and some years it doesn’t. But even if the ASX 200 does not post a gain a well balanced shares portfolio should provide a return in dividends of around 4% with some franking credits – so that’s not too bad considering what you can earn from having money in the bank.

  • 3 Biker // Apr 5, 2017 at 9:53 pm

    Greg, you’ve pretty much summed up our own perceptions.

    Where you’ve ‘gone beyond’ is actually putting a likely figure on the end position.

    I was _well_ off this year. I figured the ASX would do very little. Fortunately, selecting international shares as an asset class saved our bacon… . I’d have done much better had I moved _more_ of our TTRs from cash to ASX or international shares.

    Playing a defensive game, at this late stage of the accumulative phase, meant we lost nothing, but had we gambled on the resources recovery, we’d have a much bigger piggybank! 🙂

  • 4 lachlan // Apr 6, 2017 at 5:59 am

    Glad you posted that long term chart and trend line Greg which adds to the data you published in the same vein some years back. I think we all rely or should rely on long term trends for reassurance. I know its little comfort for those who want to sell their shares or draw income (dividends) in a near term time frame however the long term charts should help those who are ceaselessly concerned with 70-90% crashes to understand the persistent reality of inflation. And more importantly to see the necessity of long term thinking, to buy quality assets on longer term historical dips without having an anxiety attack.

  • 5 lachlan // Apr 6, 2017 at 6:04 am

    Otherwise I believe that there is ample room for a rally or a decent sell-off there since things are around middling on the trend line. I guess we need to resort to other fundamental factors then to decide which way is most likely. I feel uncertain to be honest.

  • 6 Biker // Apr 7, 2017 at 11:51 pm

    Lachlan: “I feel uncertain to be honest.”

    I don’t think there’s ever been any time in the last decade in which this sentiment was more appropriate… ,

    Nor can I remember any other period since the GFC when more black swans appeared madly honking on the globes’s horizon… a unlikely geographic analogy, I admit. 😉

  • 7 Greg Atkinson // Apr 11, 2017 at 1:30 pm

    Well both the All Ords and ASX 200 are both very close to 6,000 so things could interesting soon. Is 6,000 going to trigger some profit taking or is it onwards and upwards towards 6,500?

  • 8 lachlan // Apr 14, 2017 at 6:19 am

    Well its a bad time to be too sure Greg. However I can play with ideas. Your chart is a good for focussing on longer terms. Lets make an a priori assumption that the current trend will hold for another two plus years, just for arguments sake. As we can see there was the precipitous GFC decline followed by upward sloping, gentle flagging action…what we refer to as the post-GFC rally. If this assumption holds then maybe the action will see a return to the old pre-GFC high by about mid 2019. How exciting eh! If that were the case and if the chart were to make 6000 shortly then some retracing would be in order to stretch the rally out to hit 6851 by that date.
    Another idea. The chart makes a giant bear flag very well. The steep gfc decline followed by the flagging. Another significant decline at some stage would make a perfect abc retrace pattern. I cant see any technical reason to say when this would happen but this type of trading action nonetheless happens an awful lot. I guess we need to worry about geopolitics to preempt such an event. It seems to be the likely black swan although credit bubbles could definitely burst at the same time as an awkward period in foreign affairs emerges.

  • 9 Greg Atkinson // Apr 18, 2017 at 9:48 am

    That all seems reasonable Lachlan. For me something just doesn’t seem right with a global economy that had a debt crisis then go back to growth after a short recession by getting into more debt. The Australian economy now seems hooked on debt and the RBA is making things worse by keep rates low. This has sent investors towards the housing market and I dount many people are doing well from relying on cash in the bank. At some point I reckon we are going to have one of those nasty reality adjustments and the ASX 200/All Ords might go under 5000 again. But with Trump in the Whitehouse who can really be sure of anything these days 🙂

  • 10 lachlan // Apr 18, 2017 at 6:21 pm

    Well, some random Trumplosions in the ME and no market reaction. As you’d expect. This seppo cruise to Norkland might end badly though. Australia’s nice in Winter Greg. Come and see the wattle blossoms.

  • 11 Biker // Apr 18, 2017 at 9:00 pm

    Greg: “At some point I reckon we are going to have one of those nasty reality adjustments and the ASX 200/All Ords might go under 5000 again.” Very likely.

    Feels like the Cuban Missile Crisis all over again… . In that possible BS event, who could predict what markets might do?

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