If you were to believe some of the ramblings on mainstream media sites you might get the impression that Australian stocks have on occasions bounced back strongly and that in some way this is a reflection of how well the Australian economy is doing. However the reality is that the Australian stock market has been trending downwards since July and many stocks are simply limping from one week to the next.
As stock market investors we have to deal with reality and not hype. The reality is that just about everything that could go wrong is going wrong. The political environment in Australia is toxic, the Government is clueless, the Reserve Bank have been asleep at the wheel and the debt mess in the U.S. & Europe will weigh down the global economy for years.
Also as I have been warning about for more than a year, the Chinese economy cannot keep surging ahead whilst it’s major export markets struggle. The reality is that the Chinese economy is definitely slowing and I expect that it will slow further. The notion that domestic consumption will be able to make up for the decline in exports is a desperate wish from those China super bulls who can’t deal with the impending slowdown.
If we look at the chart for the ASX All Ordinaries Index the downwards trend is pretty obvious.
ASX All Ordinaries Index – 6 month chart
Since the beginning of July the All Ords (XAO) has been heading downwards apart from rallying back near 4400 in October. Clearly the idea that Australia is somehow immune from the financial problems in the Eurozone and the U.S. is absolute nonsense.
One major reason the Australian stock market has been sliding is that commodities prices have been declining. This decline in prices was inevitable as I have discussed several times over the last two years or so. Quite simply the the current commodities boom is coming to an end.
Commodities Futures Prices – November
As we can see from the chart above, commodity price futures (and this includes both hard & soft commodities) suggest that the downwards trend is still in place and I expect prices will keep trending downwards at least into early next year.
The decline in commodities prices has hit a range of mining related stocks and a good example to look at is Rio Tinto. (ASX:RIO)
Rio Tinto Limited (ASX:RIO) 6 month chart
I recently read a report saying that Rio Tinto will ramp up production next year because they still see strong demand for commodities like iron ore. All I can say is good luck to them as it sounds pretty risk to me in the current environment. Meanwhile Rio’s share price keeps falling and it seems likely we will see its stock price nudge $50 if the slowdown in China gathers pace.
Finally an interesting chart to look at is the Australian All Ords (XAO) versus the U.S. Dow Jones Industrial Average (DJIA).
ASX All Ords (XAO) versus Dow Jones (DJIA) 10 year chart
On the chart above I have drawn a few black bars simply to show the gap between the All Ords and Dow Jones at various points during the last bull market and now during the era of the financial crisis.
This gap has largely been created by the commodities boom although of course these are many other factors at play so I am oversimplifying things a touch.
But this chart does indicate how the Australian stock market has relied on commodities prices to drive it higher during the bull market years. Then during the height of the financial crisis, mining stocks helped support the market largely thanks to the massive economic stimulus program in China.
Now as coal, iron ore and copper prices for example continue to slide the performance gap between the All Ords and Dow Jones has gradually decreased. It is quite possible I believe that in the years ahead we will see the All Ords under-perform the DJIA which in turn probably won’t be doing that well either.
Anyway let’s hope that sometime in 2012 we see some light at the end of the tunnel and let’s also hope that this light doesn’t turn out to be an oncoming train!
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