8 July, 2010
Recent economic indicators have been pointing to a continued recovery of the world economy, although at variable speeds across countries to date. An ongoing weak labour market in the US and parts of Europe, and possible challenges confronting financial markets such as sovereign debt risk and issues relating to public sector debt, are still affecting the equity markets.
Having said that, here in Australia, we appear to have weathered the Global Financial Crisis reasonably well so far with only one quarter in the last nine of negative economic growth. While Australia's economic growth has not been startling subsequent to this brief challenging period, quarterly GDP outcomes of 0.6%, 0.8%, 0.3%, 1.1% and 0.5% in the most recent March 2010 quarter have demonstrated a resilience to economic headwinds that many other western nations continue to deal with, particularly in Europe (public sector debt, unemployment) and some segments of the United States and United Kingdom economies (unemployment, housing).
Our protection is in no small part due to our geographical location close to two of the fastest growing large economies in the world, namely China and India. These nations require great volumes of resources Australia has in abundance together with our capacity to extract and transport them to these resource hungry nations. While the level of demand for resources may soften somewhat over the next 2 years, other industries should pick up the slack and compensate any short fall in hard commodities.
Having said this, it is important to note that as the global recession continues to recede, the demand for commodities should still remain relatively strong. This combined with a more favourable exchange rate (downturn in AUS$ to around 78 cents in the next 3 to 6 months), should produce improved return on most hard and soft commodities.
The international Equity Market volatility of late has made little distinction between weaker economies and stronger economies such as ours and has been placing downward pressure on share prices recently with little regard to the fundamentals of our market. To a large extent, we are currently a victim of the price action on the international markets, a pressure which should dissipate over the coming months.
Based on Technical Analysis, the highest probability is now to see the ASX 200 pull back to be as low as approximately 3800 – or a further 6% from last editions 50% retracement projection. We would like, however to point out that we may still see the completion of the retracement phase at other technically significant support levels of 4150 and 4049. Following a bounce at any of the technically significant support levels, the market is then set to commence the next larger move up to around 8000 by late 2013.
Our end of the year target is still expected to be in the vicinity of 5400 points. With this in mind, we feel we have weathered the worst of this pullback – the extent of which was originally expected to be somewhat milder than first anticipated.
We continue to monitor the situation closely and will keep you informed should any changes to your portfolio become necessary.