Update: a look back, a look forward
The economies
The start of 2009 sees all the big economies – the US, Europe, China – in slowdown mode. This is a flow-on from the ‘credit crunch’ which has made it much harder for companies and individuals to get credit. Consequently this is affecting consumer spending and hurting sharemarkets because consumers aren’t buying at the level expected by companies and so their profit outlook – and their share prices – are falling.
The most important of the global economies, the US, is in recession. The question is how deep and for how long? It’s likely the new Obama government will come up with a variety of significant economic stimulus packages. The size of those packages – and where the money goes – will determine the depth and length of that recession.
Last year was a tough one for investors in shares. Australia’s S&P/ASX200 was down around 40%, Listed Property Securities off 50% and international shares lost around 40% of their value (in US dollar terms).
What to watch in 2009
Given the action over the past few months, what are the indicators to watch? Firstly, around the world we have seen some big interest rate cuts. These always take time to feed into an economy. The big thing to watch is the effect of the interest cuts we have already seen and how quickly economies around the world react to the different stimulus packages already in the mix.
By historical standards, governments, central banks and regulators have thrown everything they have at their economies in an effort to limit the damage from this crisis. So while the first and second quarters of 2009 may be quite difficult all over the world, we’re likely to see some improvement in the second half of 2009 as all these ‘growth’ policies start to bite.
There are a few key indicators we are watching carefully. Firstly, we want to come to grips with the size and strategy behind the various stimulus packages to be announced early in 2009. Then we’re looking for improved lending conditions.
At the moment US banks are not lending. When they start to put money to work again, things will start to improve. The other big litmus test is US housing, which is a huge problem for the US economy. Once we see a drop in the level of forced sales and foreclosures – which means people are again able to meet their loan repayments – we’ll know that all those stimulus measures are starting to take effect.
Australia versus the world
What does all this mean for the Australian economy? Over the past three months we have seen a full 3% cut in interest rates. That’s historically fast rate-cutting, but it will take a while to have an effect. Measures such as the $10 billion stimulus package announced by the Australian Government and a whole range of infrastructure projects, direct payments and tax cuts should also start to have a stimulatory effect.
Australia’s big advantage is the strength of our banking sector. Our banks were much more conservative than their global peers and not so involved in the structured financing and repackaging we saw overseas. So while Australian banks are getting pickier, they’re still lending.
The markets
As mentioned earlier, the news in early 2009 will look grim. It will certainly be a slow growth environment. But the markets have priced a lot of that in so we may start to see signs of a bottom in the equity markets. Bond and cash rates are likely to continue to fall.
Many are expecting another interest rate cut of 0.5% in February. We may see the start of a strong rally in the mid part of 2009, because valuations in shares and property are now very attractive and some quality assets have been oversold.
Reason to be hopeful?
The potential future worsening of the economy doesn’t have to mean that share markets continue to fall. This is because markets are forward-looking, and have already priced in a good deal of future bad economic news. There are thus two reasons to be hopeful. First, it may well be that the news, while bad, is not as bad as currently ‘priced in’. Second, at some stage, and possibly earlier than many think, markets will begin to look to the other side of the valley, and begin to price in economic recovery. Both of these considerations should help share markets in 2009. Of course, we also know that markets overshoot, and it is possible (although not likely) that markets will yet plumb new lows.
Tags: investment review, market update