Back in March this year, I tentatively outlined my market forecast for 2008 based on a number of assumptions as contained in my blog: Are we near the bottom. Since I am the first to admit that forecasts are rarely 100% (or even 80%) correct it would seem now is a prudent time to review my assumptions and update my forecast to cover the last 6 months of this year and a little into CY2009 as well.
Before updating my forecast for 2008 let’s look briefly at the planning assumptions I outlined in March and see if they are still valid.
Original Assumptions (With July comments)
– The US will enter a period economic slowdown. Appears valid at this stage with the US economy appearing to be slowing and maybe even entering a recession.
– The global economy will slow in 2008. Hard to make a call on this one at this stage although I feel reasonably sure the global economy is slowing.
– The Australian economy will slow further. This would seem to have been a good assumption. I also noted back in March that I thought the RBA had gone too far with the interest rate rises and that they would start to cutting rates this year. I feel I might just be proved correct later this year on those points as well.
– Commodities hard and soft will continue up their upward price trend. This appears to be the case although there have been and will continue to be, price corrections along the way. I also wrote in March that oil would trade below $100 USD per barrel and although this clearly has not happened yet, I still believe it will in the next 6- 12 months.
– The credit crisis will pass into history later this year. We will need to wait until the end of the year to see how this assumption plays out, but I am still confident by the end of this year we will be talking about the credit crisis mainly in the past tense. Already now “inflation” is now becoming “the” major concern and slowly the sub-prime/credit crisis related issues are being discussed less.
So what does this mean for the Australian Stock Market?
Basically I feel much the same way about the Australian Stock Market now as I did in March and since we are at roughly the same levels again on the ASX 200/All Ords this sort of makes sense. Looking at my assumptions back in March the main error I made was in regards to the price of oil, and this has caused some havoc with stocks prices, consumer confidence etc.
However I expect the oil price to come down but this will not prevent the Australian economy slowing further. (some commentators are even mentioning recession!)
I still believe that the financial sector stocks will rebound and I can see a point when fund managers start to go long on banks and short on miners for example.
The long held view that the commodities super cycle will continue unabated is now being tested and although I still rate quality miners are great stocks to own, in the short to medium term I expect their stock prices will come under pressure.
In summary it seems we are at a point where maybe our portfolios need to include companies that will benefit from a weaker Australian dollar, and have some overseas exposure to counterbalance an Australian domestic economy that will probably weaken further.
I will come back and review my forecast in December to see how badly I have done!