At the beginning of the year I made a range of forecasts of how key financial markets would perform in 2013. We are now exactly a quarter of the way through the year and it is timely to revisit those predictions to see how accurate or, in some cases, inaccurate they are proving to be.
When it comes to investing it is critical to be accountable for your decision-making and accept the market is never wrong.
I forecast the benchmark All Ordinaries Index to rise about 20 per cent to 5550. The assumption was falling interest rates would strong-arm investors into the stockmarket to gain an acceptable return, an outcome term deposits would no longer be able to deliver.
The All Ordinaries galloped 9.4 per cent higher in January and February as retail investors switched out of cash and northern hemisphere funds zeroed in on Australia’s high dividend-paying stocks.
In March, however, the market entered a corrective phase; it has fallen by about 3.6 per cent since March 11. Resources have taken the brunt of the selling, with renewed concerns about China’s economic circumstances.
The current pull-back should end in the next few weeks. April has been the best performing month on the Australian market over the past 20 years, with an 85 per cent positive strike rate and an average return of more than 3 per cent.
As Richard Coppleson from Goldman Sachs recently told investors in his daily report, investors are at present receiving $14 billion of dividends, most of which will find its way back into the market.
History tells us the market can rise at least another 10 per cent simply through valuation expansion before earnings growth takes over.
On this basis, I believe the All Ordinaries can surpass my original target and will hit 5600 points some time during 2013.US sharemarket
I originally predicted the US market would struggle to advance far during the course of 2013 because an economic recovery would drive interest rates higher.
In the first quarter, though, the US market has motored almost 10 per higher to record levels. The combination of accelerating economic growth and the Federal Reserve’s steadfast approach to quantitative easing is proving the elixir to extend a four-year rally.
History tells us the US is about to enter the seasonally poor period of the year, captured by the phrase ”sell in May and go away”. Given the vigorous first-quarter performance, it would be foolish to ignore this seasonal pattern.
Transcending this, though, is a rejuvenated consumer and a more bullish corporate America. Combine these elements with the Fed’s heavy foot on interest rates and the S&P 500 Index can rise another 10 per cent to 1700 points. But when Fed chairman Ben Bernanke eventually reverses his policy, investors should be wary.
Official interest rates set by the Reserve Bank of Australia have remained steady in the first quarter, while the 10-year bond rate has firmed from 3 per cent to more than 3.4 per cent. I predicted the RBA would cut by between 25 and 50 basis points during 2013, but a thumping February jobs report has the market betting rates are on hold.
I still believe the RBA will lower rates by another 25 basis points. While the lead indicators of housing finance and consumer spending are showing signs of life, the recovery is tepid. In conversations with companies over the past month, the overwhelming message is that many sectors have stalled and confidence is declining. This should see a disappointing earnings season for the period to June 30.
The RBA needs to ensure industrial companies turn up the growth dial to make up for a drop in spending by the miners over the next two years. Miners have contributed almost 60 per cent of the nation’s economic growth over the past few years.
I now forecast that official interest rates will bottom at 2.75 per cent during 2013.The dollar
The Australian dollar remained resilient in the first quarter in spite of a step-down in commodity prices. The strength has been displayed most acutely against the yen, the British pound and the euro, while it is still level pegging against the resurgent greenback.
At the beginning of the year I predicted the dollar would retain its strength, based on most of the other major currencies suffering from an oversupply due to money printing.
This prediction remains current and the dollar will continue to float in a range between US96¢ and US105¢. Falling below the bottom of this range would require the RBA to further reduce domestic interest rates and the US economy to flourish. This scenario is unlikely to present itself until later in 2013.
I had forecast that, after 18 months of declines, industrial metals and bulk commodities would stabilise during 2013 as world growth upgraded.
In January this set-up looked to be unfolding nicely, but in more recent times the story has become dubious as increases in the supply of bulk commodities and industrial metals has been met by an underwhelming Chinese economy.
China’s economic growth has taken a permanent step down and the next six months should be instructive in telling us the new long-term run rate. Until then it is difficult to see a sustained recovery for resources.
Anybody who is anyone in the investment world seemed to be overweight gold heading into 2013. This has proved to be a poor decision. The precious metal has traded between $US1570 and $US1800 an ounce for more than a year and is currently precariously poised at the floor of this range. Gold’s latest bedfellow is US-dollar weakness and, despite the Fed printing $US85 billion a month, the greenback is rising against nearly every currency except Australia’s.
Until any weakness in the US dollar resumes, gold is going to struggle to break out of it funk.
Unlike other commodities, oil has steadily climbed in 2013, encouraged by a fresh splurge of money printing and a healthier US economy. At the start of the year I believed Nymex West Texas crude could struggle back above $US100 a barrel, and at $US97 that looks to become a reality soon.
In the longer run the emergence of abundant gas around the globe and the eventual removal of quantitative easing could undermine oil quite a bit. This, though, may be a story beyond 2013.
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