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- Economic & market outlook - quarter ending 30 September 2009
Economic & market outlook - quarter ending 30 September 2009
- By Martin Fowler
- Published 21/10/2009
- Investment Insights
- Unrated
Overview - Australian equities
Over the quarter ending 30 September 2009, the ASX 200 Accumulation Index rose by 21.50%.
Over the quarter ending 30 September 2009, the ASX 200 Accumulation Index rose by 21.50%.
The Australian sharemarket rallied strongly over the quarter. Gains were relatively broadbased. Financials benefited as fears of further bad debts in the banking sector were allayed by a strengthening economy. Cyclical also benefitted as investors appetite for risk increased on the prospect of a recovery.
Valuation Update
With our fair value indicator for the ASX 200 as at 30 June 2011 sitting around 5,000 points, the market has now factored in all the expected earnings growth for 2009/10 and around 70% of the expected growth during the 2011 financial year. The market is forward looking so this is not abnormal but given the inherent volatility in earnings forecasts, the market has perhaps run marginally ahead of where it rationally should be.
Outlook
With the sharemarket already pricing in a moderate economic recovery, we would have to argue that the rapid gains made in the last 6 months are unlikely to continue. Indeed the prospect of a minor correction in the sharemarket looms large should the recovery not unfold as expected. Encouragingly, the balance sheet repair process is well advanced (but not complete) in corporate Australia which means that the underlying fundamentals of the average company are in much better shape than at the height of the market in 2007. This improvement should provide the framework for a sustainable recovery.
Nevertheless, we remain concerned about the potential impact that the imbalances mentioned in our economic commentary may have on the sharemarket. While the corporate sector is much improved, the consumer remains vulnerable to a severe downturn in the housing market should the housing bubble burst. In the near term, we view this risk as low but, unless it slowly deflates over time, remains a potent risk nonetheless. Internationally we do not believe the strong gains on numerous offshore sharemarkets are justified given the much weaker economic fundamentals abroad. The risk of a correction on these sharemarkets would inevitably impact upon our own sharemarket. For these reasons we believe it is prudent to exercise some caution in the near term, at least until signs of a sustainable economic recovery in the US and Europe become indisputable.
Valuation Update
With our fair value indicator for the ASX 200 as at 30 June 2011 sitting around 5,000 points, the market has now factored in all the expected earnings growth for 2009/10 and around 70% of the expected growth during the 2011 financial year. The market is forward looking so this is not abnormal but given the inherent volatility in earnings forecasts, the market has perhaps run marginally ahead of where it rationally should be.
Outlook
With the sharemarket already pricing in a moderate economic recovery, we would have to argue that the rapid gains made in the last 6 months are unlikely to continue. Indeed the prospect of a minor correction in the sharemarket looms large should the recovery not unfold as expected. Encouragingly, the balance sheet repair process is well advanced (but not complete) in corporate Australia which means that the underlying fundamentals of the average company are in much better shape than at the height of the market in 2007. This improvement should provide the framework for a sustainable recovery.
Nevertheless, we remain concerned about the potential impact that the imbalances mentioned in our economic commentary may have on the sharemarket. While the corporate sector is much improved, the consumer remains vulnerable to a severe downturn in the housing market should the housing bubble burst. In the near term, we view this risk as low but, unless it slowly deflates over time, remains a potent risk nonetheless. Internationally we do not believe the strong gains on numerous offshore sharemarkets are justified given the much weaker economic fundamentals abroad. The risk of a correction on these sharemarkets would inevitably impact upon our own sharemarket. For these reasons we believe it is prudent to exercise some caution in the near term, at least until signs of a sustainable economic recovery in the US and Europe become indisputable.
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