If a single word could describe the outlook for 2010 it would be ‘complicated’. While there’s less cyclical upside for Australia, the outlook for other markets is that recovery is likely to be protracted.
Outlook 2010: Transition to the new normal.
If a single word could describe the outlook for 2010 it would be ‘complicated’. While there’s less cyclical upside for Australia, the outlook for other markets is that recovery is likely to be protracted.
Hindsight makes the past seem simpler that it was, but at the beginning of 2009 two things were clear:
- Sharemarkets, credit securities and other risk assets were exceptionally cheap; and
- A recovery was likely sometime given the depth of the downturn and the amount of monetary and fiscal stimulus underway around the globe.
More than a year on, the major economies are moving out of recession. It is far from clear, however, just how strong and sustained the global recovery will be. Our view is that the recovery will be a long drawn out affair. Consumer deleveraging, the gradual withdrawal of fiscal stimulus, and the ongoing process of bank balance sheet repair will provide strong headwinds.
The challenges of 2010 will involve judging just how much cyclical upside is left in the recovery, what is the new mean reversion trend for economic growth and corporate profits and how the GFC affected risk premiums. Markets are likely to worry at times that monetary policy settings are too inflationary and at other times that the withdrawal of fiscal stimulus will stall the recovery. Concerns about excessive public sector debt levels will hang over government bond markets. The amount of cash still sitting in low return accounts is another factor to keep in mind. The cash that panicked out of shares at the bottom of the bear market last March is slowly returning. A lot of investors presumably sold at the bottom and missed the rebound. This cash could move rapidly back into the market should a run of positive news have investors worried about missing out on further gains. Equally there could be another rush to the exits on any bad news. In short, volatility is likely to be a continuing feature of asset markets.
Australia: less pain, less gain
A brutal recession in the rest of the world has been a slowdown in Australia. According to the January survey of forecasters from Consensus Economics, the Australian economy grew by 0.9% in 2009, making it the only OECD economy to have recorded growth.
Some caution on the Australian outlook seems appropriate. Although Australia’s banks are in much better shape than those in the US or Europe, the economy faces other headwinds. Monetary and fiscal tightening and the high Australian dollar will take a toll.
Having avoided the deep downturn, Australia lacks the cyclical upside of other economies. An implication for investors is that Australian corporate profits will have less rebound potential than in other markets.
The consensus forecast is for a 15% rebound in Australian EPS over 2010, while S&P 500 earnings are expected to grow by 29%. This means 2010 is shaping as a challenging year for managing asset allocation strategy.
