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Australian stocks rally to the bottom again.

October 21st, 2009 · Greg Atkinson · 4 Comments

The Australian stock market has finally rallied back up to where I believed the bear market bottom was last year but although this is a positive sign, the Australian economy faces a number of challenges in the years ahead and these might well make it difficult for the market to surge ahead in 2010 and beyond.

Back in October 2008 just after the collapse of Lehman Brothers I was convinced that the “true” bottom of the market around 5000 and wrote in: Are we on the road to the recovery of the markets? that I expected stocks to rally back up near that level quickly. I was wrong with the timing, but my reasoning was basically sound and since I accepted a long time ago that my timing was lousy I avoided making any rash short term decisions.

In fact as early as March 2008 I started to contemplate that stocks were close to reaching their bear market lows and some time later I eventually settled on the idea that the ASX All Ordinaries would bottom out just below 5000. As usual my timing was as poor as Julius Caesar’s decision to skip a sick day and head to the Senate to have a quick chat with his pal Brutus, but unlike Caesar my course of action was not fatal.

So what did I do when stocks plunged in September 2008 and the ASX All Ords headed towards 3000? Well I gradually started to buy because as a long term share market investor when I see stocks being sold off cheaply that tells me not to join the seller’s but rather look at snapping up bargains. It is not a strategy without risk as my foray into Babcock & Brown (BNB) shares clearly highlighted, but now with the All Ords up near 5000 again my purchases during the panicked selling days of 2008 & early 2009 are starting to look in good shape.

Despite the various gloomy predictions that the world was about the enter a global depression last year the reality is that we are now simply in a nasty global recession and the Australian stock market is moving around a level seen after a major correction. Market corrections are not the end of capitalism.

ASX All Ordinaries (XJO) 2 year chart


The chart of the All Ords above illustrates how the Australian stock market found a bear market bottom in 2008 around July, then fell off a cliff in September and now around 1 year later we are back up into a typical major correction level which would be somewhere between the red line I have marked on that chart and the 5000 level. (give or take a bit)

I expect stocks will rise further over the next 12 months but as bullish as I may sound sometimes I do not anticipate that next year we will be back up near the highs of 2007. As I have mentioned on numerous occasions I feel the Australian economy is not as strong as it appears on the surface and that lower commodities prices will at some point combine with lower demand to cause real headaches for policy makers. (I am quite happy to be wrong by the way)

Australia appears to have no national economic strategy for developing the economy over the next decade or longer apart from continuing to export iron ore, coal, LNG and uranium etc. The problem with this strategy is that does not take into account that other nations also have vast natural resources much of which is so far untapped. For example Mongolia has the largest unproven uranium deposits in the world and is set to be the global super power for this resource not Australia, despite all the hype in the local media.

So what exactly will power the economy along? Well according to prevailing wisdom China will lead Australia into a new era of growth and prosperity but few people seem to have thought about what will happen if that does not quite work out as planned.

Is the Emissions Trading Scheme going to help growth? No. Will the Reserve Bank’s decision to go early and raise rates help growth? No. Will the Government’s wasteful spending projects help growth over the long term? No.

At some point therefore I expect gains on the Australian stock market to be tempered by the awful reality that no matter how strong some believe the economy is, the undeniable fact is that it is not broadly based and relies to a large extent on rising house prices and commodities exports to keep it ticking along. Softness in one of these areas would put the brakes on growth, softness in both would send the economy into recession.

However my market timing skills are poor and going on past performances I am likely to be around 12 months out of sync so at this stage I have simply moved from a mood in which I was likely to buy into one where I am basically sitting on my hands. If stocks continue to rise over the next 12 months I will look at taking profits and perhaps pick up a few shares that look unloved or undervalued, but at this stage I would say I am more cautious than bullish.

4 responses so far ↓

  • 1 Ralph // Oct 21, 2009 at 2:22 pm

    Good article, Greg.

    I fully agree that the current wave of confidence is built on soggy foundations. I too agree that the ASX will tend broadly upwards, but there is plenty of reason to be worried about fundamentals. You say the economy is not going as well as it seems – it would be tanking were it not for government stimulus. Bad debts and bad investments have not been allowed to wash through the system.

    I think the interesting thing will be what happens when the government stimulus runs out, both in Australia and internationally. I understand that the Chinese have a pretty hefty government stimulus going themselves. You were nearly there when you said that the Australian economy relies on commidity exports and increasing house prices. At the moment, it also relies on government stimulus. Hardly a broadly-based economy.

    My gut feeling is that Australia has postponed the recession due to the government’s willingness to spend. Given that the US is still struggling and banks everywhere are being held up by government guarrantees, if the government does not come out with more stimulus to keep things ticking along, we’ll probably end up with the recession that we should have had.

  • 2 Greg Atkinson // Oct 21, 2009 at 4:04 pm

    Hi Ralph thanks for the positive feedback, your cheque is in the mail 🙂 You correctly mention the economy is getting a boost from the economic stimulus spending and indeed it will be interesting to see what will happen when this starts to wind down not only in Australia, but in China as well. I am not a gloom & doom sort of person but I do think the Australian economy has a recession tucked away somewhere and the longer it is delayed the worse it will be. Many Australian’s working today have never experienced a recession and have probably done little to plan for one.

  • 3 Tom // Oct 23, 2009 at 9:31 am

    I don’t think this has been the worst market to have been in historically.

    Mid Oct 2007 – early March 09: about 16months of decline.

    Jan 2000 – Oct 2002: 2 and 3/4 years.

    Most of early 2000s was negative return. At least with the recent events, only 2008 will have been a real negative year. If you didn’t buy and hold and your timing was good, you would’ve got some nice returns for most parts of 2007 and 2009.

    Even if you missed selling the market top in late 07, indicators were present all through 2008 up to Lehmann’s brothers. I think people are really cut by the new found redundance of buy and hold. The strategy is flawed and folks have learnt the hard way.

  • 4 Greg Atkinson // Oct 23, 2009 at 10:06 am

    Tom I think some people confuse being a long term investor with buying and holding no matter what. My way of thinking is you make hay while the sun shines and take money out of stocks during the good times and try and put some money back in when everyone is heading for the exit. Though I freely admit my market timing is terrible so I tend to make gradual moves in/out of stock positions.

    Yes between 2000-2003 was no fun at all and I recall wondering if the Australian stock market would ever break though and run higher than 3000. Even in 2003 people were warning of a major correction even though the market had not risen much at all.

    I think a lot of margin lending and short selling made the recent stock market correction a lot worse than it needed to be. That was bad for a lot of investors but it also opened the window for people to buy into some high quality companies at pretty reasonable prices.

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