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The Australian Economy & ASX All Ordinaries Index Review: June 2014

June 6th, 2014 · Greg Atkinson · 6 Comments

So far the Australian economy has held up quite strongly in 2014 and has outperformed many other developed economies since the GFC caused havoc across global markets in 2008-2009. Belatedly the Australian stock market has also shown post GFC bullish signs having rallied strongly from a low last year to up around 5500 this year. So all is going well right? Well not really, and if we scratch under the surface there are some very worrying trends which could cause years of strife for the Australian economy and the Australian stock market.

For some years now I have been writing about how dangerously unbalanced the Australian economy is – namely its over-reliance on commodities exports and especially to China. During that time the unbalanced nature of the economy has actually become worse and the reliance on China and commodities exports has become more pronounced. This in turn has made me bearish about the long term outlook for the Australian economy and cautious about the outlook for the Australian stock market over the next couple of years.

Of course the reality so far is that the Chinese economy has kept powering ahead in terms of GDP growth (which I think is a poor measure by the way) and this has dragged (and I mean dragged) the Australian economy along with it.

However as I have stressed on many occasions, timing with much accuracy, when markets or economies turn is much easier said than done and the economic downturn in China that I have been expecting has not materialised yet.  Yes there have been signs of slowing economic growth in China and yes the GDP numbers are not reliable, but for now the Chinese economy still seems to be expanding.

But when the Chinese economy does hit a rough patch (and maybe it already has) this will hit the Australian economy very hard. When this happens there won’t be much the Government or RBA can do since measures to protect the Australian economy from this downturn should have been implemented years ago.  It’s China or bust and in years from now I suspect “wise heads” will be writing volumes about the lost opportunities and policy errors that led to Australia becoming over reliant on commodities exports to China.

To illustrate my points let’s have a look at a few charts. Firstly Australian GDP growth.

Australian GDP Growth 20 Year Chart

australian_gdp_growth_may_2014

I posted the Australian GDP Growth Chart last year and at the time I commented that the overall long term trend was downwards which was and is  worrying sign. More worrying however is that if you strip out the commodities export peaks around 2007-08 & 2012 then the slide in GDP growth is even more steep.

These commodities peaks are reflected again in the share price of BHP Billiton as shown below.

BHP Billiton (ASX:BHP) 10 Year Stock Price Chart

bhp_10_year_stock_chart_june_2014

So I’d suggest that in an era during which the Chinese economy slows and perhaps even contracts, that Australian GDP will be at or around 2% at best and that some quarters of contraction are also likely. I am not sure when this will happen, especially since the Chinese authorities seem to been have able to stimulate their economy out of numerous tight spots over the last few years – but it will happen.

Another worrying trend as I mentioned above is Australia’s over reliance on exports to China and the chart below highlights this.

Australian Exports by Destination

australian_exports_may_2014

Of course one could argue that the reliance on the Chinese market for Australian commodities exports has been a good thing, however I am of the view that is has decimated other sectors of the economy (manufacturing for one) and resulted in mood of complacency across most other sectors.

As for commodities prices themselves, well they have slumped and the peaking in prices I warned about has turned out to be correct.

 

rba_bulk_commodities_prices_may_2014

So far higher volumes have acted as buffer to lessen the impact of the price falls but when/if volumes also  fall, then it could get very nasty for the Australian stock market and economy in general.

Finally a quick look at the Australian ASX All Ordinaries Index and some comments about the outlook for the Australian stock market.

ASX All Ordinaries Index (XAO) 5 Year Chart

asx_all_ords_5_year_chart

As I have highlighted before, the Australian stock market rallied strongly after being oversold when it was below 4400 in 2011-2012 (which I pointed out at the time).  My view remains however, that the ASX All Ords is now in the over-bought zone and to be even clearer, this means I am inclined to be a seller and not a buyer of ASX listed stocks at this time.

True I may miss out on some upside if the market heads higher, but to paraphrase what a wise man once told me “you will never make a loss by taking profits” and in the current global economic environment, I reckon that’s not a bad approach!

This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp


6 responses so far ↓

  • 1 Greg Atkinson // Jun 13, 2014 at 9:35 am

    The Australian market is down again today so the question is: is this the start of a major correction or just small pull-back before ASX All Ords/ASX 200 start another run upwards?

  • 2 Matthew // Jun 13, 2014 at 11:20 am

    A long road to nowhere perhaps?

    Not a hell of a lot of good news out in the market at the moment, BHP are allegedly pulling 3,000 roles from the total organisation, and outside of the publicised 180 I know of another 300 that have happened this week and not been mentioned in the press. The ASX probably needs to shed another 3-4% before it is considered value buying at the moment, but it could take 8 weeks to do that.

  • 3 Greg Atkinson // Jun 13, 2014 at 11:56 am

    Matthew the market does seems to be higher than where it should be taking into account the fall in commodities prices, proposed cuts in government spending and even signs the housing market is cooling.

    If the All Ords/ASX 200 got back into the 4800-5200 range I would feel more comfortable.

    But as you say it could take weeks to drop 3-4% although I get the feeling (for no good reason) we are set for sharp correction back below 5200.

  • 4 Lachlan Scanlan // Jun 13, 2014 at 12:15 pm

    Iraq and oil in the news today and although that effect may be short-lived it is worth watching here. If we end up down say 30 today then we are needing to rally off the bat next week to keep the chart climbing in the same steady pattern. Otherwise a snappy 100-200 point loss is on the cards before we can reassess.

  • 5 Matthew // Jun 13, 2014 at 4:58 pm

    Greg, it wouldn’t hurt. Based on what I am seeing and hearing in the market, with some notable exceptions (banks) reporting season will be well short of expectations. That may be what pushes it down.

    I would be very interested to see if the ASX200 dropped below 5,000. Took a long time to break through the barrier, be interesting to see if there is any resistance.

  • 6 Greg Atkinson // Jun 13, 2014 at 11:39 pm

    Lachlan I hope the situation in Iraq is a short event but I fear otherwise although the impact on the markets may not be that great.

    Matthew I also wonder how well the various support levels will hold if a wave of selling starts. 5200 might not hold for long but 5000 you would think would put up a fight. After that it could get ugly real fast I reckon.

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