Australia defies global trends
The world has experienced one of the worst bear markets on records, with dramatic falls in all the major global exchanges in the past year.
Deutsche Asset Management global chief economist Steven Bell reported the Nasdaq fell 67 per cent in the 18 months ending September this year.
The Nikkei fell 52 per cent during the same period, while the S&P 500 fell 29 per cent. In comparison, the Australian Stock Exchange was down eight per cent during the 18-month period.
Bell says this drop in markets has been shadowed by equally dramatic falls in profit forecasts.
Globally, profits are now forecast to fall by 15 per cent and US companies will experience a similar drop. Europe will not escape, with falls in profits of 18 per cent. However, the UK is predicting a four per cent rise in company profits.
Examining individual sectors reveal even more dramatic falls, Bell says. Technology company profits are predicted to fall by 66 per cent, while telecoms will fall by 41 per cent. There is not a single sector which is positive. The smallest falls are predicted for financial services companies, with a five per cent drop.
“The earnings decline is worse than 1991,” he says.
Although the markets rebounded on September 21, Bell sees stocks outperforming only until January, based on previous cycles.
The price returns in the S&P 500 from September 21 until November 11 was 16 per cent. The Nasdaq during that period gave a positive 28 per cent return.
Bell warns, however, while markets have rebounded quickly after major events in the past, such as the Cuban missile crisis, the respective economies were strong. This time the world’s major economies are weak.
The only economy which is showing positive growth and defying global trends is Australia.
Industrial production in Australia is just below the negative point, compared to Japan which is down 10 per cent. The US production is -7 per cent.
“If the economy is weak, the effect of a crisis lasts longer,” Bell says.
The US economy is also moving in different ways. Consumers have not spent their tax cuts as predicted, but are instead saving the money. There had been a strong hope the tax cuts would keep the economy running. However, the US is boosting defence spending which will help prime the economy.
Australia is defying all these trends with both consumer spending and confidence high.
“Australia is tuned for an upswing,” Bell says. “In the past, we saw Australia as a commodity-driven cyclic market, but today it is a stable, defensive market, free from terrorist attacks.”
As a result, Deutsche is now overweight in Australian stocks, due to the strong economic background and the recent re-weighting of the Australian part of the MSCI index.
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