Australian stocks seem to be enjoying a broad rally today and I suspect the mainstream financial media will churn out bullish sounding headlines when the market closes. But if we step back and review a few charts it’s pretty clear that the Australian stock market is stuck in a rut and I don’t see it breaking free any time soon.
As regular readers of my rants will know, I have been warning that the commodities super-cycle would cycle downwards at some point and I reckon we can say we are around that point now.
The chart below of BHP Billiton, Rio Tinto and the ETF Global Mining Investments suggests to me that as far as investors are concerned, the mining boom started to fizzle out around April/May 2011.
BHP, Rio Tinto & Global Mining Investments 2 Year Stock Chart
As far as most mining related stocks are concerned I see some years of grief ahead as more supply comes online just as a slowdown in demand kicks-in. It has happened before, it is probably happening at the moment and it will happen again when the next mining boom fades.
I have also been warning for some years that the government and policy makers should have been taking measures to brace the Australian economy for a decline in commodities prices, but to date they have done basically nothing.
In fact the Mineral Resource Rent Tax (MRRT) will kick in just when the commodities super cycle no longer looks that super. It makes you wonder what’s in the water cooler in the government offices in Canberra.
It’s not just the mining & resource stocks that are under pressure, even a defensive stock like Goodman Fielder (ASX:GFF) has struggled over the last two years.
Goodman Fielder (ASX:GFF) 2 Year Stock Price Chart
On a more positive note, GFF shares are probably worth watching as they might get a further lift depending on what Wilmar International do next. See: Goodman Fielder Takeover Seen With Wilmar (Bloomberg)
S&P/ASX 200 Financials Index (XFJ) 2 Year Chart
Financial related stocks have followed a similar path to the mining & commodities related stocks since the Australian stock market is basically becoming a barometer of how investors feel the Chinese economy is faring. I am not saying this makes sense, but that’s basically what is happening.
The big four Australian banks (CBA, WBC, ANZ & NAB) are unlikely to surge ahead until the housing market finds a bottom in my opinion. I am not predicting an Australian housing market crash, but I do expect home prices to drift downwards over the next year or so.
Finally let’s have a look at a stock market index which doesn’t get covered that often – The S&P/ASX Small Ordinaries Index. (XSO)
S&P/ASX Small Ordinaries Index (XSO) 2 Year Chart
The ASX Small Ordinaries Index is made of small cap stocks within the S&P/ASX 300 but excludes those included in the S&P/ASX 100. Basically it is an Index that tracks smaller listed companies.
I have included the above chart simply to show that no matter how you slice and dice the performance of the Austrlaian stock market, the reality is that over the last two years no clear trend has emerged.
My view is that we have a market that is looking for a bottom rather than a top. I expect that bottom to be around 4000 or a touch below after which we could finally see a multi-year bull market take hold.
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