FYI | Feb 17 2009
By Chris Shaw
In the view of Dr Chris Caton, BT’s chief economist, the world economy is going to get worse before it gets better and forecasts for global economic growth are going to be revised down further before the bottom of the cycle is reached.
This is the bad news, but there is a silver lining for investors as Caton points out because markets anticipate the future it means equity markets around the world won’t necessarily get worse as well. He anticipates market will actually turn around and begin to move higher before there is any evidence of an improvement in economic conditions.
Whether or not equity prices have seen their lows remains uncertain in Caton’s view as there could still be shocks that send share prices down again, but even allowing for this he sees value at current levels given the extent of the falls already experienced.
In terms of the outlook for the Australian stockmarket Caton sees the biggest concern as what happens in the rest of the world, with the outlook for the Australian economy to be the next biggest driver of share prices in coming months. Whether a recession takes hold or not is somewhat irrelevant in his view as the year will be a tough one regardless of the actual economic growth numbers, particularly given the pullback in commodity prices and the impact this is having on investment and incomes.
The tough economic outlook leads Caton to suggest interest rates in Australia still have further to fall, his expectation being for a further 1.0-1.5% in cuts to come through in coming months as the Reserve Bank attempts to stabilise growth and stimulate economic activity.
Caton doesn’t expect this will help housing prices though, as on his estimates even allowing for further cuts in interest rates property prices are likely to be flat to down slightly for another year or so. He rules out a collapse such as in the US housing market.
Caton expects unemployment will rise further, with at least another 1.0% increase expected. The concern here is when unemployment rises it tends to either rise a little or a lot and this means there is some risk the final outcome is worse than currently expected, but either the way the trend is up.
The Australian dollar has some correlation to equity markets at present and this suggests some pressure will remain on the currency for some time, though fair value in Caton’s view is somewhere closer to US75c than US65c. Given this he sees scope for a gradual recovery in the currency in coming months.
Taking a long-term view, Caton’s summary is 2009 is likely to prove to be a great opportunity for investors and he suggests those buying now will look back in 10 years and congratulate themselves for the wealth they have created by buying during what will likely be remembered as the year of the big correction.
