Australia | Mar 14 2007
By Chris Shaw
February and early March has produced a wild ride for equity investors, but the March Monthly summary by St George Bank suggests Australian investors have a lot more reasons to be positive about the outlook for the domestic sharemarket than do investors in the US.
The bank notes while China was easy to blame for the recent (and ongoing judging by today’s action) correction in share prices, there was actually a far greater impact in the US as its fall took prices back to levels of three months ago while in China it meant only a return to prices of two week previous.
Not only was the impact greater, but the bank suggests the US economy was the real culprit behind the correction as it is showing far more signs of weakness than is the Chinese economy. A clear example is the ongoing strength of economic growth in China, the bank pointing out unemployment is the only possible number of any concern currently. This is hardly surprising though given the country’s ongoing transformation to an industrialised society from a rural based economy.
In contrast there are many signs of weakness in the US economy, not the least being GDP growth figures that on an annualised basis in the December quarter showed an increase of just 2.2%, a number near the lower end of its historical range. Again this is not all that surprising a figure, as the US is at war and the bank notes this is always an unproductive drain on the economy overall.
Of even more concern at the moment though is the US housing market, which after several years of strong returns has collapsed and is pushing house prices lower. The bank suggests this market may take as much as another six months to settle, with consumer confidence and therefore consumer spending likely to trend lower.
This of course is not a good outlook for the US equity market, as lower consumer spending and a slowing economy implies lower corporate earnings. Fortunately for investors in Australian equities the bank points out the domestic economy is at a much different point in the economic cycle, so the outlook is far more favourable.
For starters our market is not overvalued in the bank’s view given the average P/E (price to earnings ratio) is around 15 times, which is at the low end of its range over the past ten years. The tend has been for growth in share prices to be more than matched by stronger earnings, the bank taking the view the market would have actually risen more but for the fact much of the earnings increase has been in the resource sector where earnings are perceived as more cyclical.
Even if the boom in the commodities sector is over and metal prices flatten out or pullback slightly, the bank expects a pick-up in export volumes to offset this. An improvement in rural conditions would also help, with the news here also positive as there are signs the drought is breaking.
The outlook for the domestic housing market is also positive when compared to the US, as tight rental markets are supporting valuations and there are signs of increased activity. It also notes futures markets are now factoring in an increased probability of a rate cut in the US by the end of June, which would actually be supportive of the Australian housing market if it led to lower rates globally.
The conclusion then is one of don’t panic, as our market should not suffer as much as the US in coming months, though the recent volatility appears likely to continue for some time as the US economic outlook remains uncertain.