Given the fact that I am arguing that we should have another good year for stocks, some deep thinking readers might be pondering how we will do it? Given the fact that the current world’s greatest Treasurer, Wayne Swan, is having trouble getting the economy to grow fast enough to create his beloved budget surplus and also given the high dollar, just how are we going to shoot the lights out on the share market?
Obviously if the economy grows slowly and the dollar remains uncompetitively high for tourism, manufacturing and even service businesses, then this will affect profits and then share prices.
Remember I have tipped the S&P/ASX 200 index to beat 5,500 this year — and that’s my biggest call, so far — and throw in that there are some experts saying a year better than 20% is possible, given that this could be the year when scared investors stampede back to stocks, and you have a recipe for a great year for stocks.
How will Australia fare?
But what about poor old Australia with our high dollar, relatively high interest rates on an international basis and a poorer than expected outlook for economic growth? Could our stocks be left out?
The RBA now thinks our economic growth will be 2.5% for the year to June. Only three months ago it was tipping 2.75% and now it thinks we will be below 3% for two years.
Fortunately the Bank has been a terrible forecaster, so we can treat these numbers with suspicion, but if they don’t cut at least once or twice more, they will make their prophecy come true.
[1]My guess is that there will be rate cuts and some banks will pass on full cuts as lending costs are getting low enough for banks to stop arguing they “just can’t pass them on!”
In fact, a leading banking economist a few weeks ago hinted to me that the full pass on will be possible soon. Something like that would help both business and consumer confidence kick in, and added to a good stock market as well as an improving world economy, it would help out commodity stocks such as BHP and Rio. In fact, the latest run up for these stocks reflects this story as markets always try a futures game. I think there is evidence the story is actually getting better.
The numbers stack up
Proof? Try these:
- China’s trade numbers were miles better than expected with exports up 25% in January.
- China’s exports to ASEAN countries were up 42.9% which confirms the IMF view that this group of countries will grow at pre-GFC levels and this is good news for us as a supplier of key raw materials to growing economies.
- China’s coal imports were up 56.3% and iron ore exports were up 11% which is good for us.
- Meanwhile in the USA their trade numbers showed its deficit was the thinnest in three years. This could help boost that advanced GDP reading, which suggested the economy had contracted by 0.1% annualized in the December quarter.
- Adding more fuel to the global growth fire was Germany, which recorded the second biggest trade surplus in 60 years!
As you can see I believe our strongest hope for a good year will be China and the ASEAN group of countries, with some help from a getting better USA which will then be helped by a faster growing Japan which is now playing the QE card. Also, Germany showed my argument that even Europe could surprise on the high side with growth. This will all help our stock market.
Of course the story suggests things will be starting to look OK around September and election time, but one thing Mr Swan has learnt is that economic crystal balls aren’t always reliable when it comes to timing.
The good news might show up for an Abbott Government, which would be an irony, as he could inherit Swanny’s beloved surplus!
I sum up the timing challenge for stocks this way: “I’m long stocks for the long-term but for the short-term — I dunno.”
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