FYI | May 22 2008
By Chris Shaw
Equity markets globally have enjoyed a solid run up from the lows of March but according to AMP Capital Investors head of investment strategy and chief economist Shane Oliver the run has been a bit too far too fast and a pullback is likely in the short-term.
The other factor supporting his view is not all of the bad economic and profit news is likely to have yet hit the market, meaning there could be some more disappointments to come to test the resolve of investors particularly given the market is entering its traditionally tougher May to October period.
The good news in all this is Oliver’s view is the bottom of the market was likely seen in March, so any pullback is not expected to be too dramatic in scope. As well, the broad trend remains for higher prices in coming months as Oliver is forecasting a year-end level of around 6,350 points on the S&P/ASX200 Index. The index closed yesterday (Wednesday) at 5,823.4.
Why the market rallied from its March lows according to Oliver is simply the economic and corporate news to come out was not as bad as had been feared, while credit markets have also recovered somewhat thanks to liquidity injections by central banks such as the US Federal Reserve.
As well, the US economy has avoided sinking into recession as consumer spending remains reasonable and corporate earnings outside the banking and housing sectors of the US market continue to be solid. The story elsewhere in the world is similar, as while European and Japanese economic data have shown signs of weakening the numbers have been largely better than the market had expected.
But caution remains the key as higher oil prices and interest rates in Australia are adding to consumer stress levels, while the upcoming tax loss selling period for equities and other seasonal factors in coming months mean the market generally may find it harder going in the weeks to come, in Oliver’s view.
He notes technical indicators support such caution as both global and Australian shares look overbought at present, while he sees the narrowness of the rally, which has been confined largely to resource and banking stocks, as another reason for concern.
While stock indices remain below their 200-day moving average both in Australia and in the US, which suggests a bear market rally, Oliver takes the view the March lows were in fact the bear market low as they were characterised by the usual features of blood on the streets via corporate collapses and high levels of investor bearishness.
Supportive of further gains medium-term Oliver points out shares remain cheap, as globally they are trading on forward price to earnings (P/E) multiples of around 13.7x, well down from their 10-year average of 17.5x. The Australian market is in a similar situation, trading on around 14x forward earnings against a 10-year average of 15.2x.
This also means shares can go higher before they again approach over-valued levels, especially as the slump in profits that lieas ahead is unliklely to be severe enough to justify current share prices, Oliver predicts. He bases this view on the strength of commodity prices and the likelihood any slowdown in global growth will be modest.
Volatility will likely continue in coming months though, so Oliver continues to suggest the best way for those with money to invest is to average it in over coming months to limit the impact of any sharp moves up or down in equity prices.
