The AMP’s head of strategy, Dr Shane Oliver last week said that ‘it was only a correction’ and we should relax.
Today he says that’s while the case, it’s still too early to issue an all clear that the correction is over.
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While share markets have had a bounce from oversold levels over the last week, it is too early to call the all clear.
The past week has seen more relatively soft economic data releases in the US supporting the view that the Fed will soon be moving towards a rate cut.
While the announcement of an 8% growth target this year for China caused a bit of concern, it should be noted that this is a very loose target and has in fact been the official target for Chinese growth for the last few years and yet growth has been coming in well above it.
The Chinese share market has been steadily recovering from last week’s losses.
December quarter GDP data in Australia indicated that the Australian economy is in far better shape than previously thought in terms of growth, inflation and productivity.
The RBA left interest rates on hold and we expect them to remain unchanged into mid year.
Uncertainty over US and global growth may linger for a while yet, the crisis in the US sub-prime (mainly low-doc) mortgage market may have bit further to run, investor sentiment has yet to reach bearish extremes that normally signal market bottoms and the last three significant corrections in global and Australian shares (in March/April 2005, October 2005 and May/June last year) lasted about a month.
· However, we remain of the view that recent turmoil is just another correction in a still rising bull market trend.
Share market valuations both globally and in Australia are reasonable, profit growth is likely to remain robust, the current slowdown in global growth will help to sustain the low inflation/low interest rate economic expansion and there is lots of cash out there looking for a home.
So notwithstanding a bit of short term volatility, global and Australian share markets are likely to provide solid gains over the remainder of the year. Our year end target for the ASX200 remains 6250 with the risk being on the upside.
· While emerging markets have been amongst the hardest hit through the latest correction in shares (markets that go up the most generally also correct the hardest), it’s worth noting that emerging country central banks are in a good position to respond to any sustained softening by cutting interest rates.
Interest rates in emerging markets are already in decline and with most running floating exchange rates there is little chance of a repeat of the late 1990’s “Asian crisis”- in fact many Asian central banks would welcome lower currencies.
So while the correction in Asian/emerging share markets may have further to run in the short term, it is likely to be short lived.
· With global growth slowing and inflation pressures receding, bond yields may fall further in the short term.
More broadly, bond yields are likely to track sideways this year as growth and inflation prove benign.
· The $A is likely to continue churning up and down around current levels with both interest rates and commodity prices providing mixed signals for the currency at present.
