Well another financial year is drawing to a close and for most stock market investors the last 12 months have not been very kind. But it is now time to contemplate how the next financial year may unfold and think about any opportunities or threats we may face as investors.
FY08/09 delivered another financial year of losses and pain for most investors and this means we have had two bad financial years in a row in terms of stock market returns. But on the bight side it is very rare for the stock market to be down for three years on the trot so maybe this time next year the bad run of financial years will be spoken of in past tense.
Around this time in 2008 I expected the stock market to remain under pressure but I also thought investors would be able to make up some lost ground near the end of the year. This did not happen and actually stocks continued to fall throughout 2008 and the downward trend was only recently broken in March 2009. But life goes on, and so I will dust off the crystal ball once again and try and guess what the next 12 months may deliver.
Firstly I do not expect the world’s financial markets to collapse nor do I see any need to sleep with gold bars under my bed because paper money will become worthless. We seem to have avoided the global “Great Depression” that was being touted by many market commentators but I doubt the next financial year is going to be a smooth ride upwards for investors.
Going into 2010 most major developed nations will probably start to see clear signs that the worst is over as far as the economic crisis is concerned, but this does not mean a return to strong growth or spectacular stock market rallies. Instead I expect at some point in the next few months for people to start to seriously questioning the merit behind the level of debt many nations have been plunged into by big spending governments.
In Australia there is already some focus on government spending but at this stage most people appear to think this spending has saved Australia from a recession. However I believe the economic situation in Australia will deteriorate and that our exports earning will not recover as quickly as Treasury officials and the Government claim.
One major assumption that is being made today by the Government (and by many governments overseas as well) is that Keynesian economics is “The” solution to the current economic downturn. Certainly some elements of Keynesian thinking should have been put into the mix of measures the Government has implemented, but it appears Australia and other nations are just blindly throwing money into their economies in the hope that the spirit of John Maynard Keynes will be pleased and his spirit save their nations from economic disaster.
But what will happen if Rudd’s billions fail to make up for the lost income from mining exports for example? Could the Australian economy slide backwards once the initial boost from the economic stimulus measures wear off? Yes it could, and at this stage this is what I expect to happen.
You can build three school halls in every school in Australia but it is not going to make up for less demand and lower prices for iron ore, coal and even gold over the next few years. Does anyone seriously think that within a year or so that we are going to bounce all the way back to the boom days of 2007? We may get there eventually but it is going to take some years and to antcipate a rapid turnaround is a little too optimistic in my view.
Therefore I believe many companies focused on the domestic consumer market in Australia will continue to struggle in 2010 although some of the more major players might be snapped up by Japanese companies and other overseas investors. There might even been a few takeovers although this gets a little tricky to wiggle past the ACCC sometimes.
The mining sector will probably remain under pressure and I would guess there will be more mergers and acquisitions in this area so it is probably not a bad idea to own some mining stocks. Some smaller miners may even fail so this makes investing in these sorts of companies tricky.
I know a lot of stock tippers will tell you that investing in small caps miners is a road to riches but believe me, you can also rack up some nasty losses as well going down that path. As a holder of shares in Croesus Mining I know just how bad things can get, after all Croesus was a gold mining company that managed to basically collapse during a gold bull market! (let that be a warning for all you gold bugs out there)
I am sticking with my view that it is worth investing in alternative energy companies and there are still see bargains out there for those who can handle a little higher risk. It looks like solar and wind power generation is going to get quite a boost in the years ahead and this sector should do alright even if the Australian economy struggles for a few years.
I am less bullish on healthcare related companies than I was last year as I feel the Government will need to cut back on healthcare spending eventually to get the budget under control. The Government has already trimmed some medical benefits and scaled back the private healthcare rebate and I would guess this is just the tip of the iceberg.
I expect oil to trade closer to $80 than $60 in 2010 and so there is probably quiet a few oil and gas stocks worth looking at. If oil prices do creep up this will probably put some pressure on inflation so I have factored in a few interest rate rises over the next 12 months. My guess is that we will probably see the first rise later this year or the Reserve Bank could be asleep at the wheel again and have to react to an inflation problem next year by rushing to raise rates.
I am also going to go out on a limb here and say the RBA should not cut rates again. The solution to an era of cheap credit is not to make borrowing money cheap again and in any case I fear that if rates are cut again then the RBA may be setting the residential property market up for a nasty correction in a few years. (not a collapse though)
Finally I reckon having a few financial related stocks in a portfolio will pay off in the next year or so. I am not actively looking at buying any bank stocks etc. at the moment but simply holding onto what I already have and expecting their stock prices will creep up over the next months.
So in summary I would say I am cautiously optimistic about some sectors of the Australian stock market and that I feel FY09/10 will be a better year for ASX listed stocks than FY08/09. However I am not bullish on the Australian economy in general and continue to favour companies that earn a considerable amount of their income via overseas operations as a hedge against weaker earnings from a the Australian domestic market.