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The future’s not bright for the Australian Economy

July 27th, 2015 · Greg Atkinson · 11 Comments

Some years ago when I wrote that it was only a matter of time before economic growth in China slowed and commodities prices fell, the mainstream media in Australia at that time were obsessed with the commodities super cycle and the Chinese “miracle” economy. However now there is widespread acceptance that the commodities boom is over and that the Chinese economy isn’t bulletproof after all. However it now seems difficult for many to accept that as a consequence of those two realities that the Australian Economy is poised for some years limited growth…at best.

Although many agree with the view that the Australian economy will struggle in the years ahead it wasn’t that long ago that an assortment of economists, analysts and columnists were convinced that the Chinese economy would go from strength to strength and take the Australian economy along for the ride.

But as I wrote in the middle of last year, the commodities boom was over (see The End of the Commodities Boom) and it was likely that the Australian economy was going to find the next few years to be quite a challenge.

As the chart below highlights, commodities prices have slumped back down to their GFC lows and unlike back then, there is no massive Chinese economic stimulus coming to rescue them again. As with all economic and asset class cycles, a period of high growth has given way to a downturn and we are left guessing where prices will bottom out.

RBA Index of Commodities Prices (Large)

Even before the fall in commodities prices the Australian economy was unbalanced and had many structural problems, but quite amazingly these problems have been pushed aside over the last few years and the illusion of sound economic growth has been maintained. But eventually these unbalances will cause significant problems and dampen GDP growth for years to come.

For example home prices and activity in the real estate sector (including construction) are now one of the main drivers behind GDP growth. That worries me because the growth in home prices in Australia is no long sustainable at current levels in my opinion.

However as the chart below shows, Household “Net worth” has almost recovered (as a % of annual household disposal income) to the pre-GFC level and many would see that as being a positive indicator.

Australian Household Wealth July 2015

But the above chart can be misleading because annual household disposable incomes (in dollar terms) may also not be sustainable. Remember that low interest rates are effectively creating more disposable income, but how long will that last and what will this chart look like when interest rates rise?

Australian Housing Loan Approvals July 2015

Another worrying trend is the surge in Housing Loan Approvals after the GFC especially since the RBA started to cut interest rates. Also as the above chart shows the surge in loans has mainly been for investors which I would suggest is another worrying trend. How well for example are these investors prepared to deal with higher interest rates and a property market correction?

Now let’s look at Australian GDP growth since 1993 and what is pretty clear is that the long term trend is downhill.

Long Term Australian GDP Growth

Clearly the peaks above 4% are becoming a lot rarer and GDP growth is drifting down towards 2%. Meanwhile loan approval for investors are surging which I would suggest is largely because of the RBA’s rate cut moves which in turn is making the economy even more unbalanced.

But on a brighter note, there are signs that the Australian stock market may fare better over the next couple of years.

ASX All Ordinaries Index Long Term Chart

ASX 200 Index Chart 1988 to 2015

On the above chart I have drawn a 20 year trend line in green plus underlined each major bull market phase with an orange line. I have also underlined the period I call the GFC phase with a red line.

The first observation I will make is that the recent correction has simply returned the ASX All Ordinaries to the long term trend line. Yes there was a lot if excitable headlines in the media as usual, but looking at long term charts helps us keep things in perspective.

Secondly it appears to me that a bull market is starting to establish itself.  I’m not quite really to make a bull market call just yet as there are plenty of drags on the market at the moment, however I am now less bearish in regards to my outlook towards the Australian stock market.

Lastly although this long term chart of the ASX All Ords is very interesting it cannot be relied on alone to predict the future movement of the market. Remember the trend is your friend only until it turns and bites you! Yes the market may rise more or less in line with the long term trend for a few years, or it could suddenly reverse and a major correction take hold.

My view at this stage is that despite a sometimes bumpy ride ahead, the All Ordinaries Index will finish the year close to the long term trend helped along by a low interest rate environment and a weakened Australian Dollar. (which makes the Australian stock market relatively good value for foreign investors).

So the outlook for the Australian economy may not be good, but it’s quite possible that for the next couple of years the stock market will edge higher and move towards 6500 again.

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


11 responses so far ↓

  • 1 Greg Atkinson // Aug 7, 2015 at 5:18 pm

    Bad day and week for the ASX 200. Today alone it fell -135.3 points to finish at 5474.8. But the sell-off is perhaps overdone now so next week might be a little better…I hope!

  • 2 lachlan // Aug 8, 2015 at 6:14 am

    yeah that was a shocker at the end there…before that it looked like the a great bottom formation was in place and surely a few new longs were shaken off their perches. Nothing comes easy in this sort of market

  • 3 Greg Atkinson // Aug 13, 2015 at 9:40 am

    It’s a sit on your hands type of market at the moment I reckon. If the ASX 200 range of stocks dips much further below 5400 I might get interested but for now I will let this period of market turbulence work itself out.

  • 4 Jeremy // Aug 20, 2015 at 1:11 am

    What are your thoughts on whether the ASX can reach the 5900-6000 range again next year, especially in the absence of the main potential negative catalysts (China, US, Rates, Property) actually coming to fruition to affect the economy for a while yet.

  • 5 Greg Atkinson // Aug 20, 2015 at 11:50 am

    Hi Jeremy,

    I would guess at this stage that the ASX 200 is a touch over-sold now and that next year it will make another run towards 6000.

    From my point of view the ASX 200 is back to the long term trend and the mining related stocks (and some other stocks) and taking a hit due to the slowdown in China which I been saying was on the way for some years.

    Yes the global economy isn’t in the best shape but unlike many other stock markets, the Australian share market is nowhere near multi-year highs and there are some good blue chip stocks which pay a decent yield trading a fairly attractive P/E, P/B levels.

    Patience however is a virtue in this type of market just as it was back in 2008-2010 and I am certainly not looking for any short term gains.

  • 6 lachlan // Aug 21, 2015 at 6:11 pm

    Wow Greg, that’s over 700 points off the xjo since April. Last two days have made everything much worse. But yes the move should be getting old and due for relief. Raise rates now anyone?

  • 7 lachlan // Aug 22, 2015 at 5:48 am

    Did you see the dj last night?

  • 8 Greg Atkinson // Aug 22, 2015 at 10:09 am

    Hi Lachlan, yes it was nasty last might for US stocks and all in all the markets have had a tough week. But corrections are normal and I think most people would agree that the DJIA has had a very good run over the last few years.

    I guess the ASX 200 will get hit hard on Monday but when it’s under 5400 then I start getting interested again in sold down blue chip type stocks.

  • 9 Stillgotshoeson // Oct 15, 2015 at 10:53 pm

    Perth seems to be under pressure.

    http://www.afr.com/real-estate/perth-agents-downcast-as-experts-warn-more-pain-to-come-20151006-gk2r4t

    Those that bought a few years ago will be fine. More recent purchasers, maybe less so.

  • 10 Greg Atkinson // Feb 11, 2016 at 11:20 am

    Will GDP growth for the Australian economy slip under 2% soon or is that the case already I wonder?

  • 11 Greg Atkinson // Dec 7, 2016 at 10:37 am

    GDP figure today: – 0.5% which means the GDP number for the year is now below 2%.

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