ING director Don Stammer says it looks increasingly likely that the low point for the US market was last October, when the Dow Jones touched 7200. By the end of April, at 8470, it was close to 18 per cent higher.
The Australian market appears to have reached a turning point in mid March, when the S&P/ASX 200 hit a low of 2693 as war with Iraq approached. By the end of April it had bounced almost 12 per cent to 3007, limiting its loss for the full financial year to June to 1.7 per cent.
However, not everyone is convinced that recovery is assured. Macquarie Equities strategist Tim Rocks says: “We’ve seen a burst of optimism over the last few months and I’m not convinced it can be sustained.”
CommSec senior strategist Craig James believes the markets have started to turn, but with the post-war rally constrained by SARS and confrontation with North Korea, there is no clear air for markets to rally in. He says: “Uncertainty is the real killer of markets.”
But uncertainty also creates opportunities for investors who are prepared to stay around for the long-term. HSBC chief strategist John Banos reflects: “You get the best value when uncertainty is high.”
Many analysts believe investors are not as averse to risk as they have been in the recent past, and that low-risk assets, such as cash, fixed interest and listed property, are beginning to look expensive relative to shares.
Stammer says: “There’s so much good news still in the property market that it’s alarming, and there’s so much bad news in sharemarkets here and in the US that it’s comforting.”
If the economy performs well, earnings will follow and so will share prices, but few analysts believe that earnings will increase sufficiently in the medium-term to justify the start of a new bull market.
The big issue for all equity markets is the state of the US economy, where growth has stalled due to high consumer debt, excess capacity, a growing budget deficit, and overstated corporate earnings.
Godfrey Pembroke head of broking investment services Cavil Singh is concerned that the US dollar could weaken as George Bush, gearing up for re-election, pushes the budget deficit to 6 per cent of gross domestic product.
In economic and political terms, James says, Australia is perceived as, “an island of stability in a turbulent world”. In fact, the country is gaining interest from global fund managers, who are increasing their weighting of Australian equities at the expense of its Asian neighbours.
James believes the Australian market is relatively sound and though not cheap, is no longer expensive. He expects the All Ordinaries to reach 3150 by the year-end.
In mid-March, the All Ords price/earnings (PE) ratio of 14.1 was the lowest in 11 years. The market rallied 7 per cent in March and 4 per cent in April. This lifted the PE to around 15.5, below the long-term average of 16.
Banos has a 12-month target of 3500 on the All Ords, which translates into an 18 per cent capital gain, but he points out that including dividends, long-term investors should fare even better.
He says bank stocks have a dividend yield of more than 5 per cent fully franked and equity risk premiums are at their highest level in 25 years.
He adds: “Investors are being given a big buffer in the form of a risk premium above the cash rate for investing in shares.”
There may be a general consensus that equities have turned the corner, but there is wide disagreement over the magnitude of the recovery and hence the strategy investors should follow.
Banos is bullish about the outlook for Australian equities. He explains that earnings have improved and should continue to grow in the year ahead, valuations are at their most attractive in recent years and interest rates are at historic lows.
He says: “In my view the Australian dollar will appreciate against a weakening US dollar and this favours companies with assets in Australia.”
Stammer believes the equity market will continue its modest but uneven recovery, led by the banks, Westfield Holdings and the like, and later spreading out to the broader market.
In fact, there is already activity in the small companies sector, where bigger players traditionally look for growth opportunities when the economy is expanding.
Rocks, however, expects significant bad news will emerge from the upcoming season of annual general meetings. He hazards a guess that the market levels achieved in the past month could be as good as it gets for the next 12 months.
Even if the economy picks up in the second half of the year, he only envisages the market returning to recent levels, not surpassing them.
The point most analysts do agree on is that investors should expect total sharemarket returns in the high single digits instead of the 10 to 12 per cent returns they were enjoying five years ago. But when you look at the returns available elsewhere, 8 to 9 per cent begins to look good.
