Market Outlook - Autumn 2009
Share markets around the world continue to be volatile. Early in 2009 further price falls and increasing investor pessimism extended the bear market but we may now be seeing the beginning of a recovery – only time will tell. Much will depend on signs the recession in the US economy will bottom out in 2009 and that the world’s banking and credit systems are coming back to life. While it is early days and further setbacks are likely, there are indications we are getting closer on each.
The Obama administration was able to get its economic stimulus package and finance sector support changes through Congress. This includes measures to help stimulate lending in the economy and clear the bad loans that had frozen credit markets that were holding back lending.
The recent meeting of the Group of 20, the world’s largest economies, agreed to a number of initiatives to support economies suffering from the global credit crisis and economic downturn. There was also a commitment to better regulation of the major banks and extending regulation to other financial businesses including hedge funds.
Glimmers of hope are also emerging that while the US economy continues to slow, it is at a lesser pace. Employment continues to fall and unemployment rise and concerns remain over the US car industry and more specifically General Motors. Housing prices continue to fall in many regions but there have been very recent signs of increasing sales of both established and new homes. The G20 meeting agreed to a number of actions that should see more support for economies suffering from the global credit crisis.
While these measures are patchy they provide support to market sentiment that the US economy should be stabilising later in 2009. The unprecedented levels of market volatility and the extreme levels of negativity have subsided with the US and Australian share markets up some 30% and 20% respectively since the lows of March, but there still remains a long way to go before the bad news and economic effects of the crisis pass. While share prices and sentiment may have changed, it is wise to remain cautious.
The Australian economy remains in much better shape than the other major economies and our banks remain profitable, stable and among the highest rated in the world. Tightening loan conditions for business and households and overall uncertainty remain problems, and the economy is in a technical recession already. It seems likely however, that with the demand for new housing now growing, the positive impact on retail spending of the cash handouts and the coming surge in public works, this recession will probably be milder here than in other major economies.
The Rudd Government recognised risks to the Australian economy well before the effects were fully felt locally and their stimulus packages have been at the forefront of protecting Australia’s economy from the severity of the global crises. This has been helped by falling interest rates, lower petrol prices and the fall of the Australian dollar as commodity prices fell. Interest rates continue to be cut, with the Reserve Bank’s cash rate now down by 4.25% since September 2008. The Reserve Bank retains some headroom should economic conditions warrant and our expectation is for further rate cuts through mid 2009.
In the May Federal Budget just released, as with earlier stimulus packages, there is a strong focus on further reviving the domestic economy through infrastructure spending. There have also been reductions in benefits and concessions that were extended to more affluent people through the good times – an attempt to slowly reduce the very large deficits now forecast for 2009/10 and following years.
In the second half of 2009, we expect underlying confidence will remain fragile, despite the current positive sentiment in global and Australian share markets. Substantial issues remain in effectively implementing the various stimulus packages and finance sector regulatory changes, along with keeping global trade open. Lack of progress would be damaging to confidence.
We won’t know for some time the future impact of the massive amounts of stimulus from Government spending and the big interest rate cuts, along with the need to finance the increased and very large Government budget deficits. This may lead to increasing inflation and higher interest rates in 2010 and beyond, after earlier fears of deflation. Markets have already pushed longer term interest rates higher in anticipation of higher inflation and Government borrowing demands. Conversely, gold has also been supported recently – a suggestion some fear of Depression.
We expect there to be further poor economic data released through 2009 but markets are leading indicators and are now looking to an economic recovery and higher profits in 2010. This, along with a view that the sell-off in equities had gone too far compared to any reasonable outlook for current profits, has helped markets start to recover after some of the most difficult market conditions in modern history.
There have been false dawns in the past and it is possible share prices may fall again. On balance however, the broad global economic and financial outlook, while still difficult, now has some glimmers of hope for 2010 and beyond. So it seems more likely than not that the last eighteen months of very disturbing and trying times for investors across almost all asset classes could be largely behind us.
As your adviser, we are here to assist in guiding you through the current markets and should you have any further questions regarding the outlook or any other specific investment issues that are concerning you, please raise them with us.
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