ONLY three things in life are certain: death, taxes and pundits predicting the sharemarket will rise by 10 per cent next year. It is a delicious irony that markets are impossible to predict with any precision while those who are paid to espouse their views professionally are so staunchly predictable.
Year in, year out – in a pack – they predict a 10 per cent increase, or perhaps a range of, say, 5 per cent to 10 per cent, just to be different. Just before the great meltdown in 2008, it was the same, and things are no different this year.
So be it. To complement this year end’s suite of utterly useless sharemarket forecasts, here is our not one-year, but two-year, view: it ain’t going anywhere.
The sharemarket should either fall and recover slowly, or rally hard then drop like a stone. The coming year or two will be a traders’ market, characterised by special situations, and opportunities in only some sectors.
The local index went nowhere in 2010, in fact, and – against a backdrop of rattling economic growth in China – could plausibly have a 15 per cent belter this year before retreating. As far as forward earnings go, share prices are reasonable. The US is desperately trying to inflate its way out of economic misery, and China – upon whose fate hangs our market these days – keeps growing like the clappers.
On a two-year view, however, it is hard to get excited about equities. During the boom years inflation was tame, at less than 3 per cent, and interest rates were low and mostly falling. This was the Goldilocks economy – not too hot, not too cold, but just right. The American consumer was ever resilient. In China, demand for raw materials exploded and wages were dead low.
That has all changed. On Wednesday, Beijing announced that minimum wages would rise by 20 per cent in the new year. Inflation is running (on official figures) at 5 per cent or more. The regime has slammed on the banking credit brakes, and it is hard to envisage – although they have done it magnificently – the authorities managing growth and inflation as comfortably as they have done so far.
In most rich economies, save Australia, the interest rate cycle is just kicking off. US bond rates have been jacking up since November, after almost three decades of bull markets – that is, bond yields falling. Since the Goldilocks years, the jobless rate has doubled to almost 10 per cent. US debt is racking up borrowings at a rate of $4 billion a day. The US is in decline, as evinced by its gargantuan debt and insipid recovery. It is now down to Asia.
The other thing that militates against a sustained return to a bull market is leverage. Leverage, or debt, at both personal and institutional levels, remains too high. It was rising leverage that fuelled the record bull market. During the deep recession of the early 1990s, household debt in Australia was 60 per cent of income. That pierced 160 per cent at the cusp of the global financial crisis (GFC) and tumbled to about 120 per cent on fears of the dramatic recession we never had in 2009 – thanks to minerals, China and low national debt.
Household debt is now pushing through 140 per cent again. The scope for the same sort of growth that produced years of sizzling sharemarket gains is simply not there any more.
The mighty Aussie dollar hit records against the greenback and the euro this week. There is a yin for every yang. Although we burst with pride at the performance of our economy and its monetary unit (whose supremacy is due, fortuitously, to the earth underfoot being chockers with minerals), most other countries, including China and the US, are doing their darndest to drag their currencies lower. It’s better for exports and better for growth.
The Reserve Bank is not fretting overly, at least not yet. A high currency saves it from having to slow down things by jacking up interest rates. And demand for commodities, soft and hard, is at record levels.
Yet Australia is quickly heading towards ”most expensive country in the world” status. There is no reliable measure of this. The rub with most ”most expensive country/city” surveys is their reference to the US dollar, which has been sinking.
The signs are there. Pintprice.com shows we are a competitive nation when it comes to the price of a pint of lager, at £3.31 versus £6 in Norway (and an economical 36 pence for a pint of Bumthang lager from Bhutan).
Other measures are not so forgiving. In the Mercer cost-of-living survey for expatriates – 200 items measured in 214 cities – Sydney rallied from 95th ranking to 15th between 2002 and 2008 and, with the most recent currency rise, must now be in the top five. At midyear Mercer ranked Sydney the 24th most expensive city worldwide and Melbourne the 33rd.
On the Numbeo cost-of-living survey, Sydney ranked behind Dublin and Geneva only (OK, and Stavanger in Norway). It was on par with Oslo and well ahead of Paris, Washington, London and Tokyo, measured on a basket of groceries. Those numbers, too, are old hat.
The effect of rising prices and a strong $A on tourism has been dire, to the point of hitting our balance of payments and economic growth hard. But that is the price for sovereign success, and every self-respecting corporate lawyer, banker and consultant skiing in Vail or Val D’Isere this season will be revelling in the fruits of our (partly) accidental success.
Happy new year to all.