Is that light at the end of the tunnel or the headlights of an oncoming train?
2008 marked the worst calendar year performance for the Australian share market, surpassing the falls experienced in Great Depression. The Australian share market closed the year lower by some 40%. So the question is: where to from here?
Investors who buy stocks now are likely to be cheering in a few years, but they could rue the decision in the next few months.
On traditional valuation measures, the Australian share market does look cheap. The problem is that traditional valuation measures like price-to-earnings ratio and dividend yield can no longer be trusted. We are in an environment where company earnings are expected to be impacted by dire economic times.
Long-term patient investors, who have time to ride out economic cycles will be fine. However, those investors wanting to jump into the market may find themselves bearing the brunt of the market volatility in the short to medium term.
The other problem we face as we embark on 2009 is a falling cash rate. The old sanctuary of switching to cash investments is far less attractive.
There are plenty in the market at the moment saying that the 7%+ dividend yields on equities outweigh the 4.25% (and decreasing) cash rate. Indeed, these commentators may prove to be correct – however we are expecting equities to continue their bumpy ride for some time.
Expect to see increases in corporate collapses in 2009, increases in unemployment and negative GDP growth as emerging markets like China slowdown in line with the rest of the globe. These economic issues will continue to cause volatility especially in the banking and financial sector.
As a counter to these negatives, expect to see further interest rate cuts and government spending.
2009 should be a year of corporate accountability and consolidation. Companies with high debt levels or companies that need to refinance loans this year should be avoided. The old art of reviewing a balance sheet before investing is true now more than ever. Companies with low levels of debt, stable earnings and transparent business models should be able to survive the economic storm.
If you are in the market, stay in. Be sure to review your investments to make sure you are not paying too much in fees.
If you are considering starting out now, proceed with caution. Many economists expect things to improve in the second half of 2009. Although these same economists didn’t predict the magnitude and extent of the current economic woes.
If we can take anything from history.... that is when the market does turn, it will turn quickly. Personally I expect the Australian share market to close 2009 at around 4,200 points (+15%). Although it will be an up and down ride along the way.
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