2009 a Better Year for Investors - a Near Certainty
Submitted by: Consult
2008-12-22 00:04:23
As 2008 draws to a close, there won't be too many people sorry to see the back of it. It's been an awful year for investors, and also for the world economy. It has also been a year of extraordinary market volatility, with the exchange rate and commodity prices, for example, gyrating widely.
As 2008 draws to a close, there won't be too many people sorry to see the back of it. It's been an awful year for investors, and also for the world economy. It has also been a year of extraordinary market volatility, with the exchange rate and commodity prices, for example, gyrating widely.
(OPENPRESS) December 22, 2008 -- As 2008 draws to a close, there won't be too many people sorry to see the back of it. It's been an awful year for investors, and also for the world economy. It has also been a year of extraordinary market volatility, with the exchange rate and commodity prices, for example, gyrating widely. Over a long run of history, the average daily movement in the Australian dollar has been 0.6 US cents. In October this year, it was 3.7 cents!
When one writes about the future, there is nothing that is certain. But the closest one can come to certainty is that 2009 will be a better year for investors than 2008 was. The same statement won't be true for the economy, which will clearly get worse before it gets better.
I have outlined before my belief that share markets will bounce higher in the short-term, and then trend higher sometime later when analysts begin to acknowledge that there is another side to the valley; that economic recovery will eventually come. The reason for the short-term bounce is that markets are simply oversold (too cheap). This bounce may already be underway.
Recessions and global economies
Certainly the world economy is in dire shape! There are recessions almost everywhere, and importantly they didn't begin after Lehman Brothers went bankrupt. In the US, the National Bureau of Economic Research has officially confirmed that the US has been in recession since December 2007. Europe, Japan and the United Kingdom (and let's not forget New Zealand) have also been in recession for many months.
The average recession in the US in the post-war period has lasted 10 months, which means this one is almost into overtime already. Calculating this average over the entire period for which we have data stretches this average to 18 months, which means that we could be about halfway through. I was asked recently at a presentation what meaning one could attach to averages at a time like this, and it's true that they are of limited use: after all, how many people in the entire world have the average number of legs?
How does the Australian economy fare? But there is something that happens in every bear market and, for that matter, in every economic downturn. At some stage people give up. It is difficult or impossible to see what will lead the market (or the economy) out of it. But something always does. Indeed, markets turn before there is a skerrick of good economic news. But it's too early for a solid sustained 'bull market' recovery.
We will know more when we get the September quarter national accounts in early-December. These are likely to show that the economy grew hardly at all in the quarter, and by less than 2% in the past year. If economic growth is reported as negative in the quarter, the media will have a field day. It will be our first negative quarter since late 2000, after the GST was introduced. But slightly negative or slightly positive, the point is the same: the Australian economy has slowed significantly and it will continue to get worse before it gets better.
But how bad will it be? It's impossible to tell right now. When I forecast by spreadsheet, putting in what I think consumers are going to spend, what business is likely to do etc, I don't get a recession. What I get is a prolonged period of slow growth. But think about it this way: we haven't had a recession in 17 years, and we all know that there will be another one some day. If this is the case it is reasonable to ask: if the current conditions (weak trading partners, falling commodity prices, loss of wealth, plummeting business and consumer confidence, malfunctioning credit markets) don't put us into recession, what will?
Unemployment set to rise
In any case, whether 2009 turns out to be a year of slow growth or a year of full-fledged recession, one thing is certain - the unemployment rate, currently 4.3%, will rise. If it goes to 5%, we will have done remarkably well. If it hits 6%, that still won't be too bad. The danger is that it goes through 6%. History shows fairly convincingly that when unemployment rises, it either goes up by a little or it goes up by a lot. There is little or no middle ground. Hence if it goes through 6%, 8.5% may be more likely than 7%.
But whatever the final figure, Australians are not used to rising unemployment. It hasn't happened for seven years, and the mere prospect of bad times ahead is already causing both businesses and consumers to cut back on discretionary spending. This is how slowdowns feed upon themselves!
The inevitable fall of commodity prices
The big uncertainty about the slowdown in Australia is the effect of falling commodity prices. In the five years to the June quarter 2008, the commodity price boom meant that the ratio of Australia's export prices to our import prices rose by an astonishing 65%. There isn't another developed country in the world that experienced that degree of largesse. Since we export about a fifth of GDP, this relative price rise meant a 13% real income gain for Australians on average. Of course, if you live in Western Australia, you did even better than this, on average, but all of Australia gained the benefits.
The commodity price boom led to a huge surge in company tax receipts, which was used as the biggest single source of finance for the six-in-a-row individual income tax cuts. The boom was a tremendous source of economic growth, and the decline in commodity prices will inhibit growth. In particular, mining investment will slow significantly.
The fall in commodity prices was always going to happen one day. The China-India story is still there, and bodes well for the long-term outlook for commodity prices, but the fall currently being experienced reflects the fact that prices were so far ahead of any sustainable long-term trend. It was a big mistake to think that Australia would be shielded from a weak world economy because of our relationship with China.
Early in 2008, it was fashionable to believe that China and the rest of Asia would be relatively immune from a world economic slowdown because, inter alia, China could quickly switch from exports to middle-class consumer spending and thus maintain its double-digit growth rate. No-one believes this 'decoupling' view anymore. Indeed, in the most recent quarter, astonishingly, Chinese industrial production has actually fallen. As the chart shows, no-one should be surprised by occasional sharp falls in commodity prices!
Economic recovery on the horizon
The Australian economy will get worse yet, but markets don't have to. They have already factored in a lot of the bad news still to come. And somewhere in (the first half of?) 2009 there should be a solid market rise as economic recovery appears on the horizon.
