There’s a big question to be asked after this week’s June quarter growth figures and the end of the reporting season.
How come the share prices of our local (and internationally facing) companies aren’t higher is our economy is performing so strongly?
And why is there this silly knee jerk reaction to every bit of poor or indifferent economic or corporate news from the US.
Why, for example, will the reaction of the US market to Apple’s new internet TV service, or its updating of its IPods (whose sales are sliding, like those of ageing car models) matter in Australia?
You can bet that if the launch sparks a rise in the US market, or in a fall, our market will react.
If the US economy slides into the red in the next year, it won’t hurt the Australian economy if it is driven by weakening domestic US demand, as it looks like.
If it’s the result of more financial instability, then we will be impacted.
But of greater impact would be a slump in China greater than we are currently seeing, but many investors, especially in the US and Europe, fear the worst about China and our shares are hit accordingly.
But it now looks like China’s economy is landing softly as the growth momentum loses the stimulus driven pace of 2009.
The Chinese economy will now probably see another two quarters of slower (than first quarter 2010) growth before an upturn around the middle of 2011.
So far China’s economy hasn’t stalled and the housing boom hasn’t flopped, despite all those local and international experts forecasting its collapse.
And that’s good news for Australia, but it seems to be given less weight by investors than the latest poor economic data from the US.
Local investors seem not to understand that China’s huge domestic economy, even in its current undeveloped state, is proving to be a counterweight to slowing demand in housing and from some sectors of industry (steel and aluminium).
Chinese exports have remains solid, imports are down (as are imports into Japan) as domestic demand slows, but hasn’t slump slumped, so far.
More importantly, it’s proving to be something of a counterweight to the weak growth in the US.
As we saw with the surveys of manufacturing this week, China’s has stopped easing, unlike the rest of Asia.
That’s better news for us than what happened in the US or Europe, it registered on local investors, but that was all.
The US jobs figures for August tonight our time, could see the market reverse course if they are as bad as forecasts now think.
But while difficult for the US, it will be of less interest to us in Australia where we will get our monthly employment update next week.
The kneejerk reactions to US events, and not the strength of the Australian economy and corporate sector, has a lot to do with the mindset of the investment community, brokers, fund managers, advisers and the like. America is still the big guide, the golden door.
And yet there’s been a flood of figures and news stories in the past month pointing to one fact about the American market, that less and less of each daily dealings is linked to fresh new investment and more an more is just churning and tailing chasing by so-called high speed traders, using big computers and models to make a lot of money from millions of tiny deals.
Retail investors have fled direct involvement in the market for the comfort of indexed funds or bonds, or for the adventurous emerging market investments.
Contributing to the flight has been the housing slump, the job losses, the loss of income and the huge sharemarket losses (and the fact that US shares have not grown in the last decade).
And, as we will soon find out (when US authorities produce a report on the event), it is the high frequency trading computers and their owners in the banks who helped give us the May 6 flash crash that is now being seen as a confidence-destroying slump in the market that has also helped push retail investors out of the market and deeper into bonds.
America’s banks are recovering, US companies are sitting on a nearly a trillion dollars of cash (and have high debt levels into the bargain); corporate America is both strong and weak with no confidence.
In Australia, a different story.
This week Moody’s said it expects most of corporate Australia to maintain stable credit ratings in 2010-11.
But it warned that conditions will remain choppy for retailers, airlines and building and construction companies.
Well that’s not new news, but given construction is very solid at the moment (as the national accounts show), it’s perhaps a bit cautious.
Moody’s said uncertain consumer demand, the wear-off of stimulus provided through government handouts in 2009, higher interest rates and a business sector that has yet to fully recover would weigh on retailers, airlines and building materials and construction companies.
The US will probably have more impact on building products companies like Boral and James Hardie than local demand.
And anyway, demand in the economy is not weak, as again, the national accounts showed this week.
"Ratings stability remains our base case for corporate Australia, supported by the recent reporting season which saw results – across the board – within our ratings expectations," Moody’s said this week.
Around $14 billion of corporate debt needs to be refinanced in the next year to 18 months, but with banks starting to fret about losing high class business customers, that won’t be the problem that some analysts seem to think.
Moody’s sees Australian companies turn
