The September sharemarket curse continued in 2014, with the All Ordinaries index falling 5.8% to close the month at 5,296.8 points. Aussie shares have now declined by 1.0% for the calendar year, however there are compelling reasons to suggest that the September market performance was an 'aberration' and not the start of a systematic decline.
Global sharemarkets were mixed for the month of September, with the US Dow Jones Index falling 0.3%, the London FTSE falling 2.9%, the Hong Kong Hang Seng Index falling 7.3% and the Japan Nikkei 225 Index gaining 4.9% for the month.
A key reason why I believe that the September fall is an 'aberration' is, in part, due to international influences. The US economic recovery appears to be gaining pace with improving consumer confidence, employment growth and strong housing starts. In China, infrastructure spending has shifted from a decline on a 'year-on-year' basis to an increase, and the property market is getting government policy support.
Although there appear to be more challenges on face value for the Australian economy, the Australian sharemarket should be able to 'ride on the coattails' of global sharemarket growth. However, if dividend yield and 'franking credits' are not a priority, international shares offer an attractive risk/reward proposition (noting that the Australian Dollar fell 6.6% in the month of September and is currently buying 87.26 US cents).
It has been well documented that the Australian economy needs to transition its way from the resources capital expenditure boom that has 'propped up' economic growth in recent times. Resources private sector capital expenditure is forecast to fall from around 7.0% of Australia's GDP to around 2.5% of GDP over the next couple of years.
The transition away from the resources boom was never going to be easy, however a 'hot' domestic housing market has helped in the early stages of the transition (as our wealth has risen on the back of higher property values). Nevertheless, despite the rise in household wealth, wage growth is near the slowest on record as shown below.
If wage growth continues to stall, consumer spending (which accounts for 53% of Australia's GDP) is also likely to decline. This will only add upward pressure on the unemployment rate, and downward pressure on both interest rates and the Australian Dollar.
The 'ace up the sleeve' of the Australian economy is relatively high (by international standards) interest rates (noting the RBA kept the cash rate on hold at 2.50% per annum in September). Although the RBA board has stated concerns of a 'housing bubble' developing, it is hard to mount an argument that interest rates will increase any time soon (and certainly not before the US begins to rise rates).
The benefit of low interest rates is further support for consumer spending and a decline in the value of the Australian dollar (thereby making the services sectors of the Australian economy more attractive). In addition, with low interest rates, shares look attractive based on dividend yield alone (which is around 1.5% to 2.0% above the RBA cash rate).
It is also important to note that Australian banks have now secured their funding base and are not expected to offer competitive interest rate 'deals' (relative to the RBA cash rate). This alone could lead to a 'demand shift' away from cash to shares.
Finally, I note that Australian companies are still forecasting earnings 'growth' for the year ahead. This growth should ultimately lead to a recovery in share prices, noting that if earnings expectations are met (and market 'price-earnings' valuations hold up) the Australian sharemarket could reach 6,000 points by mid-2015 (an increase of around 13.3%).
While I am far from 100% convinced that there will be no earnings downgrades in the near term, I am certainly not of the view of an 'across the board' decline in Australian company earnings (as opposed to a reduction in the rate of forecast growth). Unless you are of the view that company earnings will decline, the logical conclusion is that the September sharemarket performance is indeed an 'aberration'.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.