According to the AMP’s Dr Shane Oliver, shares appear to be setting up a base for a decent rally over the next few weeks or months.
He said on Friday that despite more bad economic news, the key US share market has managed to hold up reasonably well and the Australian share market actually managed to move higher over the week suggesting that a lot of bad news is already factored into share prices.
It’s also positive that the fall in share markets over the last few days both in the US and Australia has come on lower volumes which suggest that selling pressure now has less conviction behind it.
And most importantly investor sentiment is so bearish it’s bullish with everyone talking about a bear market which is normally a good sign from a contrarian perspective.
While the further plunge in US consumer confidence was taken badly by many, it’s interesting to note that in the past when it has fallen to these sorts of lows, e.g. in 1990 and in 2003 the US share market had already bottomed and was starting to head higher.
The relative resilience of the Australian and Asian share markets over the last two days in the face of falls in the US share market is a positive sign, suggesting that investors are becoming less skittish.
If this were two weeks ago they would have plummeted in the face of US weakness!
While shares look likely to put in a decent rally over the next month or so, it’s premature to say we have seen the bottom for the bear market.
With more bad news likely to flow on the US and global economy the next three to six months are likely to remain rough and this may see new lows in shares, probably driven by non-financial cyclical shares. Australian shares also have to face the fallout from high local interest rates and the strong Australian dollar.
As such, it remains a time for caution.
But given all the short term uncertainties and the possibility that we have already seen the low, or at least any further downside is likely to be limited, the best approach is to average into shares over the next 3 to 6 months. However, regardless of whether we have seen the low or not, we remain bullish on shares on a 12 month view.
Valuations are very attractive with shares trading on extremely low price to earnings multiples, big 20% to 30% falls in profits are already factored into share prices and the global monetary backdrop is becoming extremely stimulatory.
Bond yields may still fall slightly as global growth slows. However, with yields now being very low they offer very poor returns on a one-year perspective. Australian bonds offer much higher yields which are likely to fall as the RBA moves in the direction of cutting rates some time in the next year.
As such, Australian bonds should have much higher returns than global bonds over the next year or so.
The ride for the $A over the next year is likely to be rough as slowing global growth weighs on commodity prices periodically and as Australian growth slows, leading to local interest rate cuts in 2009. But still high commodity prices and still relatively high local interest rates should ensure that the $A remains reasonably strong.
Expect a range of around $US0.85 to possibly as high as parity against the US dollar.
