One year has now passed since the failure of Lehman Brothers sent global financial markets plunging and only recently has it felt that the global economy may finally be entering a period of recovery. But will conditions be better or worse in 12 months? Will house prices be higher or lower and where will Australian stocks be in September 2010?
The reality is that any prediction about the state of the Australian economy in September 2010 is at best a guesstimate and the chances of it being right with any degree of accuracy are slim. But like most investors I have to at least consider what might happen in months ahead and hope that I am at least a little more right than I am wrong. (although it is often the other way around!)
Rather than simply outlining my view regarding we might be in a years time I would like to open up the discussion and invite readers to also put forward how feel Australian stocks, house prices and the economy will be faring when September rolls around once again.
So after reading my outlook for September 2010 please feel free to comment not only on my ramblings, but also share with us your outlook for the Australian economy and let’s see how we all look in 12 months time!
Anyway at the risk of being very embarrassed in the not too distant future here is my attempt at reading the tea leaves.
Global Economic Background
Overall I expect the global economy still to be weak next September but most OECD nations should be showing signs of growth. Debt of course will be a major concern and governments will be trying to ease back on spending while carefully watching to see how private sector demand is faring. In short the worst of the economic crisis will be behind us, but we will still be feeling its effects and working to repair the damage.
In 12 months time I expect (hope) the ASX All Ordinaries/ASX 200 will be higher than they are now. My view for a long time has been that the pre-Lehman Brothers level of about 4800 was the place for market during a recession and so if we not in a recession in September 2010, then we should be above that level.
If I attempt to say in more detail where the stock market will be then I will most certainly be wrong, so let me be a little vague and say I expect the Australian stock market to be up around the mid 5000 mark in a years time.
The ache in my left leg is telling me this might be a little low, but my head is saying that there are still a lot of challenges ahead for Australian companies and the impact of the ETS (Emissions Trading Scheme) is a big unknown. So although I am optimistic about the future I still remain cautious regarding the outlook for Australian shares over the next 12 months.
Australian House Prices
This is a subject that always causes quite a debate and over the last few months I have moved from a position of being fairly optimistic about the housing market to now being a little cautious.
The reason I am now a little cautious is because I expected home prices in Australia would have cooled a little during the economic downturn and I did not expect the Government to come in and increase the first home buyers handout.
This combined with lower interest rates has no doubt helped support the market in the sub $500k area and therefore I would expect when interest rates climb and the extra money for first home buyers ends, then prices are bound to fall back in this price range.
But will the government actually remove the extra handout for first buyers or will they simply find another way to prop up support the housing market?
I am not expecting an Australia-wide real estate bubble like collapse, but dare I suggest that prices in a years time are down say on average around 10%? (and yes I did pluck that number out of thin air) In others words I expect the residential real estate market to cool a little, not plunge.
I am probably in the minority, but I feel the Australian economy will still be fragile next September. Michael Pascoe and other financial commentators/journalists may feel commodities exports will be strong, but I don’t think they quite get how price cycles work.
Our commodities exports in dollar terms held up well because Australian miners hit a sweet spot in 2007-2008 where volumes and prices we both high. But it takes time for lower contract prices to trickle into the system as a result of falling demand and although Australia was still earning big bucks in early 2009, it is clear revenues are falling, and falling fast.
Yes commodities exports are coming down from records highs, but they are still falling while at the same time the nation is racking up billions in debt. In addition the mining industry will need to deal with the extra costs imposed by the ETS and we might find that exports like coal (even when we bury C02 underground and try to forget about it) may not be as strong as we expect.
I would guess our farming related exports will probably be doing well (if the weather is good) but these are not going to make up for a fall in the dollars from iron ore & coal etc. I also feel pretty sure the number of foreign students coming to Australia will be much lower until we manage to properly manage this sector.
So although I don’t anticipate Australia will be in a recession this time next year I am more cautions than many about Australia’s growth prospects. I simply believe that a lot of the economic forecasts coming out now are overly optimistic and we seem to be relying on China perhaps a little too much.
So that is my view of how things will look in September 2010. I know it is a little vague but my crystal ball has been dropped a few times over the last year and that is the best it can come up with this time around.
So now over to you…….