FYI | Apr 13 2012
by Peter Switzer, Switzer Super Report
My view on the stock market this year is more cautiously positive than last year. For your information, I always start my forecasting with what is going to happen on Wall Street and then I hope the follow-the-leader pattern happens and we also head in the same direction.
I got it right last year for my US call, but the Australian market let me down. So, what’s the story here and will we play catch-up with Wall Street this year?
One of the most frustrating aspects of being in the prediction game is that the criteria you use is never the same and changes in crucial determinants can have a big bearing on what happens to markets and individual stocks.
Let’s look at the reasons why our S&P/ASX200 index has lagged the S&P 500. Over 2011, we were down 14.5% while the S&P 500 was flat and the Dow was up 5.5%. And this year, the Yanks have come out of the blocks like Usain Bolt while we’ve looked like a retired athlete who has got on the grog! The S&P 500′s up 8.8% while we are up 5.8%, but at least we are heading in the right direction.
Here are the reasons for our bad showing last year:
• Relatively high interest rates that both attract potential foreign share buyers and which actually make shares less attractive.
• The high dollar has hurt various exporters and import-competing businesses. David Jones is losing business to Bloomingdales in New York because the dollar takes well-heeled travellers overseas to buy their suits and frocks.
• China’s slowdown has hit the likes of BHP and Rio and bank stocks worldwide have been beaten up and these six stocks – the four bank and the two big miners – make up a massive chunk of the index!
• Government policy has been a turn off with the carbon tax and the mining tax hitting various industries and businesses as well as undermining their relative competitiveness.
• Leadership issues and the hung parliament have not helped confidence levels and that does not encourage investment and positive economic activity.
• The industrial relations system is now more pro-worker than pro-business and while you can argue that’s okay on an equity basis, it is not a plus for both real business and stock market investment.
• Generally, in an increasingly globalised and competitive environment our more generous wage system puts some of our producers at a disadvantage. The likes of Harvey Norman are not only competing with low-cost online rivals they have to beat low-cost competitors overseas.
• All of these factors have contributed to a general wariness towards investing in Australian stocks at a time when the GFC and its impact on share values as well as super balances have spooked many investors. Cash and fixed income is relatively more attractive and as we have not had a massive injection of money from the central bank, as we didn’t need it, our stocks have lagged.
What will change?
Going forward, I expect interest rates will be cut at least two more times, which will bring the dollar down. China will progressively look healthier and the US recovery will continue though it could slow a bit.
And I believe over 2012 and 2013 there will be a decent spike in Aussie stocks and we will start to catch up on those tearaway Yanks.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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