Rudi's View | Mar 29 2007
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck
As the end of the month is drawing near, most equity markets are at or near their levels prior to February 27, the day when Chinese stock markets closed 8.8% lower and triggered a global angst response which saw equity markets worldwide shed value rapidly in the days following the event.
The swift bounce has already led some expert commentators to question overall market sentiment at the time: correction? What correction?
Admittedly, any investor who had taken a four week holiday on a remote island in the Pacific and returned now would hardly notice anything different. Certainly “correction” would not be the first assumption when looking over his share portfolio.
As pointed out by some market commentators already, the irony of this story is that the Chinese share market post February 27 swiftly reversed its path, breaking one record high after the other. The Chinese share market is up more than 140% over the past twelve months and showing no signs of slowing down so far.
The world is changing and some experts believe recent performances of share markets across the globe are already reflecting this, with the list of top performing markets exclusively populated by so-called emerging economies, but above all by Asian equity.
Australia is doing relatively okay. Depending on what happens over the next few days, Australian equities should have advanced almost 6% over the first three months of 2007. That is a long way off gains of 60%+ for Ukraine and 40%+ for Vietnam, but nevertheless significantly better than developed markets such as Germany (up 3.5%), Japan (up 1.7%), the UK (up 1.1%) and the US (unchanged).
Is Australia’s performance reflecting the world’s shifting focus towards emerging Asia? Whatever the explanation, with many an expert advocating since late 2005 that Australians should increasingly shift their investments overseas, one would hope that whoever followed this advice has allocated a big chunk of these funds to emerging Asia and not to mature markets in the US or Japan.
Another question that logically comes to mind is: how long before Wall Street will lose its bellwether status? The Australian share market, for instance, has consistently and significantly outperformed US shares over the past years.
It is not difficult to see this pattern repeating itself throughout 2007.
It would seem the winds of fortune have once again chosen diverging paths for Australian and US share markets. The difference is probably best illustrated by the fact that the local bond market has finally taken notice of the fact the RBA may soon raise interest rates once more, while US treasuries are priced for potentially three rate cuts between now and December.
Investors are counting on the fact that if problems in the US housing market turn out worse than anticipated, or if problems with sub-prime housing loans do spread out and impact on consumer spending, the Fed can jump to the rescue and start lowering US interest rates.
While it remains yet to be seen whether such a scenario would ultimately turn out supportive for equities -history shows when interest rates go down to prop up the economy share prices tend to reflect worse case scenarios- soon the market’s focus may shift again to the dangers of rising inflation and this would spoil such an easy rescue scenario.
Over the last few weeks, most natural resources have been in a strong come-back mode once more and crude oil has certainly not been an exception. Market experts cite a stronger than anticipated global demand, with fast depleting inventories at a time when the US driving season is about to commence.
Market indications are that short term investors are again jumping on the opportunity of a rising oil price. This should come as no surprise with technical chartists pointing out the odds seem clearly in favour of firmer prices into next quarter.
Some expect WTI spot oil at US$65/per barrel as early as this week. Others talk about oil prices remaining above US$65 for several months at least.
Meanwhile, geopolitical tensions have again come to the fore with Iran not only unwilling to halt its uranium enrichment program, but now also having detained 15 British sailors and marines in the Persian Gulf.
In the short term, rising prices for commodities and energy should fuel further share price gains for companies with leverage. This bodes well for investors in the Australian share market.
Given the combination of relatively cheaply priced shares of resource companies and the odds in favour of another local interest rate hike, many a market strategist has been advising investors’ portfolios should be overweight resources and banks in Australia.
The main question remains, however, at what point will concerns about economic prospects in the US take the upper hand again? A gradually weakening US dollar in combination with higher priced oil are bound to pull the inflation monster back into the global limelight.
And to what extent can Australia stay immune from further US jitters?
