Last week was probably the best trading we’ve seen this year on stockmarkets.
For consistency, momentum and breadth, the markets in Asia, Europe and the US advanced solidly; ignoring more problems in the banks and worries about housing in Spain, the UK and of course the US, and interest rates and inflation in Australia.
China though remains on the weak side of healthy and Japan is sliding slowly towards an inconclusive shallow recession.
The AMP’s Chief Strategist, Dr Shane Oliver takes his weekly look at what’s ahead.
Shares look like they have more upside ahead of them at least for the next month or so.
Markets are bouncing back from being dramatically oversold into mid-March and investors are starting to give the Fed’s recent actions to stabilise the US financial system the benefit of the doubt and as such are prepared to look for better times ahead.
But while shares look like putting in more gains over the next month or so, it’s still too early to say that we have seen the bottom of the bear market. Bear markets are typically interspersed by quite sharp rallies as shorts are forced to close their positions and that may be all that we are seeing here.
More bad news on the US and global economy is likely over the next three to six months and this will probably mean that the ride for shares will remain rough into the September quarter and a fall back to new lows can’t be ruled out.
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, 20% falls in profits are already factored into share prices so analyst earnings downgrades are already allowed for and the global monetary backdrop is becoming extremely stimulatory.
Bond yields may still fall slightly as global growth slows. However, with yields now 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 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.
