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Australian Stock Market Outlook & Forecast for 2017

April 3rd, 2017 · Greg Atkinson · 26 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

26 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! πŸ™‚

  • 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. πŸ˜‰

  • 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 πŸ™‚

  • 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?

  • 12 Shaun // Apr 25, 2017 at 3:44 pm

    Greg, if you use a logarithmic long term chart, I reckon the year end 2017 is around 6400. I tend to use logarithmic when the period is long, like multi-decades.

  • 13 Greg Atkinson // Apr 26, 2017 at 9:13 am

    Hi Shaun. That sounds like a reasonable approach and 6400 is certainly not out of reach for 2017. It looks like the ASX 200 is making another run towards 6000 today and if it gets some momentum it might be closing in on 6400 within 6 months. But I still reckon things are all lined up for a correction back down towards 5500.

  • 14 Biker // May 10, 2017 at 12:06 pm

    Any comments on The Budget, Greg?

  • 15 lachlan // May 13, 2017 at 6:18 am
    ANZs comments.

  • 16 Biker // May 13, 2017 at 11:41 pm

    Thanks for that clip, Lachlan. Hadn’t seen it previously… and it seemed like an attempt to summarise, without bias, what might be happening.

    We’re actually in the process of reviewing our relationship with the ANZ. We’ve been with them nearly 25 years, but we’re losing faith in their direction. We’ll probably switch within a year… .

  • 17 lachlan // May 14, 2017 at 6:22 pm

    I thought the same Biker.

    Banks: I’m a Suncorp customer. My business banker is probably one of those employees that any business would love to have. She’s very efficient not to mention punctual and polite. I’m not too sure about the banks direction however I haven’t asked too much from them yet, just small commercial loans.

    I’m going into cash now Biker bar a few shares. Even the shiny stuff is going. I want my farm soon. My business needs more space. Not sure if I own this business or vice versa. I’m single still and can’t see where anyone except my kids would fit in to the schedule. Oh well, at least there’s a real chance I wont die broke! And as long as “big coal” keeps buying my products. Ha, my techy son is one of Elon’s greatest fans.

    I don’t know too much about the budget yet. Waiting for you and Greg to start…otherwise I watched a few videos on it.

  • 18 Biker // May 14, 2017 at 8:09 pm

    We certainly live in interesting times, Lachlan.

    On ‘going to cash’: I recalled a really interesting item related to Marcus Padley, here:

    After the B & B debacle, I’d lost confidence in Padley, but lately I’ve read two very relevant items he’s written recently. The first was related to ETFs… the second to the need to be defensive in the post-accumulation phase (which I’m in, probably for the long term!)

    I’m still trying to figure out some aspects of The Budget, particularly in relation to property.

    On Musk, it’s interesting to read about the reason Tesla just dropped 6%. Was Elon trying to be too S3XY?!~ πŸ™‚

  • 19 lachlan // May 16, 2017 at 9:14 pm

    Interesting article Biker. Yeah I’m no devotee for cash and stocks can be good even now depending on ones timeline. However I just have to get liquid to make my move on property. I am not sure that rural property won’t come off more. I could look at rural debt and global risks and see an argument. However in my position (considering my business position) it is the right time to position myself and jump in. I use private farms and state forests all over southern and central Queensland however there are some activities I will need my own large block to make happen.
    I like Elon’s attitude. He has made some interesting claims about electric cars and there imminent mass adoption etc.

  • 20 Greg Atkinson // May 17, 2017 at 8:22 am

    Biker I think I have reached a point of budget fatigue. I was thinking of writing an article about it but if I did it would mostly be a list of complaints. My only comment is yet again we see that the government is unable to control spending and is looking under the couch for money. I guess there are some good measures/reforms in the budget but nothing to get me excited πŸ™‚

  • 21 Biker // May 17, 2017 at 11:24 pm

    Greg, I think we’ve all reached that same level of tired detachment… . I appreciated your couch-fossicking analogy, which reminded me of the ANZ’s latest promo on the great excitement of finding cash in a pair of one’s old jeans… !

    Lachlan, going to cash to buy your rural property makes great sense, especially if you can (also) base your business, or major elements of your business there… and write-off some of the interest. You’d need to discuss the pros and cons with a good accountant… . (There are cons.)

    A pro: We’re now growing so much more food on our ten acres… having learned a lot more about productivity in the last couple of decades. The missus is now dehydrating a lot of what we grow, so seasonal production is becoming less important. As food prices rise, we really enjoy totalling up the savings we’re making eating fresh, pest-free organic food.

    I was intrigued to discover today, that Padley has ‘republished’ an article titled “ETFs are for investors who want to play safe” (The Weekend West, 29 – 30 April 2017) online yesterday 16th May 2017, as “Trading Shares is Now A Poor Man’s Game…”:

    Our plan to buy annuities faltered once we learned that annual income would be taxed. Why pull money out of _untaxed_ Super, if that’s the case? Difficult to find worthwhile annuities _within_ a Super fund… so we’ll probably go the ETF / SMSF route in early 2018.

    Musk should be pleased with Falcon 9’s successful lift-off yesterday. Just read that Tesla stocks now exceed Ford’s, despite much, much lower production figures. Early daze… .

  • 22 lachlan // May 19, 2017 at 6:05 am

    Greg I remember when we whinged about Keatings $9B black hole. Its funny now to look at the figures 20 odd years later.

    Those clocks are amusing.

    In any event I remember a day when many would have thought that a government collapse would be likely with such gov debt figures. But then there are trade deals and whatever.
    So then the average Joe simply concentrates on what these alchemical (its in the dictionary Biker) digits will buy for the collective. And life will go on. Until whatever.

  • 23 lachlan // May 19, 2017 at 6:09 am

    My accountant is booked in for next week Biker. I’m very lucky to have the business I have. There’s no investment that would compare. I have to work hard and take risks of course. Anyhow the property I want will be a business purchase too. I’m waiting to see what the accountant predicts for tax etc.
    Oh yes, would be a great place to live too. Plenty of bush and wildlife and some parts are already protected with regional ecosystems of some value.
    I watched the video of Elons Falcon 9 last night. Awesome!

  • 24 lachlan // May 19, 2017 at 5:05 pm

    As your article says Biker it can be hard looking out for too many shares when you’re already busy. I did well enough out of oil/energy except for Santos, but all up a fair profit. Admittedly I never intended to trade out so quick. However I’m just so busy, the correspondence was a burden and I want my dirt now…I need the cash. I wondered at the beginning is all… if an ETF may have been simpler to play oil.

  • 25 Biker // May 20, 2017 at 7:31 pm

    Great to hear you’re doing so well, Lachlan. Sounds like it’s all lining up for you.

    You may want to check out Tesla’s new roof tile concept, if you build.

    My problem isn’t a lack of time, rather a lack of _expertise_ in identifying shares immune to loss. My mate (78) has managed to stay ahead of the game, but none of his skill has rubbed off on me. I made pocket money for some time, but nothing like our property investments returned over time.

    On ETFs, our sons have done well. Greg once commented that had our eldest bought prior to the GFC, he’d have taken a major hit… and I learned later that he DID and he DID(!) His recovery was fairly swift, but only because his ASX component was minor.

    Hope your accountant has the answers you need, Lachlan. We’ll consult with an advisor in two weeks. For us, timing is critical with the EOFY so close, my missus’ 65th less than two weeks later… and the Super / Tax changes imminent.

  • 26 Biker // May 23, 2017 at 5:31 pm

    “You may want to check out Tesla’s new roof tile concept, if you build.”

    Or maybe not, Lachlan:

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