So when we broke for Christmas last month the market was worried about inflation, the rising level of corporate activity by private equity groups and their mates in investment banks, economic growth, a strong labor market, bank earnings and debts, commodity prices, whether China will continue to grow this year, oil prices and the drought.
Whew, a list that long would have given anyone indigestion at lunch on the 25th of December and a sleepless night or three around New Year.
But here we are, two weeks into 2007 and excuse me but who pushed the instant replay button? Have we got the tail end of 2006 all over again?
The market continues to worry about all of the above, especially commodities, oil prices, China, the US and its housing market, inflation (even though bananas are back to reasonable price levels).
Oil prices have started the year weak to wobbly thanks to the Big Warm in the Northern Hemisphere and the US economic sluggishness.
Petrol prices will be pressured to fall under $1 a litre locally in the next week or so and the automotive sector will have a good start to the year (is the Repco takeout going to prove too cheap at $1.75 a share?).
Along with bananas this could make the March quarter CPI very cheery indeed but by then we could be wearing a fourth rate rise (the March CPI will be out around Anzac Day in April).
The big danger for consumers and prices is still from the food group with the impact of firstly the drought on grain prices (breads and oils and meat) and then the impact on meat once the rains start breaking the drought (whenever) as growers withhold stock and start the re-stocking process. That’s something to watch from March onwards.
Industries such as energy are consolidating because it’s easier to merge than compete for many Australian CEOs: the buyout mania will continue because it’s easier to get finance than register a car these days.
Consolidation will continue in parts of the healthcare industry (distribution: API vs. Sigma). It will also startin parts of the mining industry and its services sector as companies slash spending and try to bring costs under control.
And of course there’s the media: half dressed and nowhere to dance until the new media laws are proclaimed by the federal government.
The Ten Network, STW, Macquarie Radio, Macquarie Media, Southern Cross Broadcasting, News Corp (which returns to the ASX fold this year via inclusion in the Standard and Poors major indicies) are all worth watching.
The AMP’s Dr Shane Oliver says:
“The rough start to the year for share markets, with most markets down for the first five trading days, some commentators have been referring to the so-called “January barometer” which runs something like “as goes January, so goes the year”. However, the reliability of the January barometer for negative starts to the year is rather poor.
“Since 1985 for the US share market the success rate of a negative January in predicting a negative year for shares is 50% and the success rate of a negative first five trading days in predicting a negative year is just 22%.
“In Australia, since 1985 the success rate of a negative January in predicting a negative year for the share market is just 14%, making it useless as a predictive guide.”
He says share price valuations are reasonable, a topping out in the global interest rate cycle will allow price to earnings multiples to rise after falling over the last few years, profit growth is likely to remain reasonable as global growth makes a soft landing, and the world remains awash in excess savings chasing a limited number of investment opportunities.
“Despite the wobbly start to the year, which I think largely reflects a bout of profit taking after the strong gains into year end; Australian shares remain on track to provide strong returns over 2007. Valuations are reasonable, profit growth is expected to slow but will still be solid at around 10% and capital flows into the share market are likely to remain strong propelled by continued takeover activity and robust superannuation inflows.
“However, investors should expect a decent correction (of around 15% or so) in Australian and global shares at some point along the way this year, within the context of a rising trend in share prices.
“Bonds are currently undergoing a bit of a correction in response to recent strong economic data. However, we remain of the view that bond yields will drift lower this year as global growth slows and inflationary pressures recede. The return from bonds is likely to remain subdued though on the back of their low running yields.
“The huge year end surge in listed property trusts has left them very vulnerable to a further back up in bond yields.
“While returns are likely to be reasonable this year they are likely to be way down on the 34% listed property trusts returned last year.
“The $A is torn between the conflicting forces of expectations of higher interest rates locally and the softer trend in commodity prices, the outworking of which is likely to see the $A simply continuing to churn up and down in the same $US0.68 to $US0.80 range it’s been in for the last three years,” Oliver said.
As we saw over Christmas/New Year the $A ran up to $US80c mark and took fright and fell back as commodity prices eased and oil prices softened.
Copper prices will have to be watched: it’s the bell-whether for the entire metals complex: either it recovers from the sell off of the past months (it fell around 20 per cent over Christmas/New Year) as stocks fall and demand grows in China and India, or stocks continue to edge higher and the price heads south as hedge funds and other speculators bail out.
Iron ore prices might have risen for this year but coking coal prices fell and Australia earns more from exports of this coal type than we do from iron ore.
With copper, oil
