Investors primed to charge into bullish market

THE stars are aligned for the Australian sharemarket to have its best year since 2009. Lower interest rates and a nascent recovery in the non-mining sector of the Australian economy should provide the impetus for investors to rediscover the market. With that preamble here are my predictions for 2013.

Sharemarket

SINCE June 2012 the benchmark All Ordinaries Index has rallied 13 per cent. First out of the blocks were our big four banks and the high-yielding defensive stocks. As investors grew more confident money trickled down into the economically sensitive areas of the market, a decision inspired by the Reserve Bank of Australia's (RBA) move to lower official interest rates in October and December. Finally, a steadier economic environment in China was enough for mining stocks to start rallying after a dismal 18-month period when the materials index crumbled by more than 30 per cent.

The All Ordinaries has the ability to rise another 20 per cent in 2013, taking it to around 5550. The majority of these gains should be achieved by about September, at which time higher valuations and the prospect of tighter monetary policy will take centre stage. Driving the gains will be lower official interest rates, forcing investors out of cash and into the market. Early signs of a recovery in the domestic economy will also provide comfort. Company earnings growth will still be pitiable for the year to June 2013, but analysts may be forced to upgrade earnings in the year to June 2014, something that has not happened for six years.

This bullish view is also based on previous first-year recoveries in the Australian sharemarket after protracted periods of under-performance. The average 12-month performance of the market in the recovery years of 1932, 1975, 1983 and 1993 was 42.55 per cent.

A rally of this magnitude would lift the All Ords to about 5700, still some 20 per cent below the all-time high in November 2007.

US sharemarket

UNPRECEDENTED support from the US Federal Reserve has driven the US market 115 per cent higher since March 2009. In the past six months, though, the US market has underperformed against its global peers, including Australia.

This should continue in 2013. While the Australian market is enjoying a relaxation of monetary policy, the US market is almost tapped out in this department.

Another handbrake on the US market is the traditional fiscal belt-tightening that takes place in the first year of a presidential term. With the machinations of the fiscal cliff now upon us, some form of austerity will take place even though it is unlikely to address the long-term government debt problem.

With this backdrop the world's largest equity market is likely to wax and wane in 2013 without making any meaningful gains. Even if the economy shrugs off these manacles and company earnings grow, investors will then have to contend with the prospect of the Federal Reserve starting to unwind its luxury level accommodative monetary policy. Reducing liquidity is historically a headwind for equity prices.

Interest rates

HEADING into the break the RBA was poised to reduce interest rates by between 25 and 50 basis points. I believe it will cut by 50 basis points before pausing to gauge the impact lower rates have on the economy and the Australian dollar. The decision by the federal government to abandon a budget surplus for the 2013 financial year means the RBA will be hesitant to cut rates below this level.

Lower rates will have the dual effect of forcing investors into higher risk-higher return assets and to kick-start a jaundiced domestic economy late in 2013 into 2014.

The Aussie

THE dollar has been unshakable in recent times with investors continuing to flee major currencies of the world in search of a relatively strong yield. Our dollar strength is likely to continue for the first half of 2013.

This multi-year trend of a rising Australian dollar may conclude if the US economy shows signs of a decent recovery later in 2013 with unemployment dropping towards 7 per cent. Resurgence in the world's largest economy will see US bond yields firm and investors flock to the greenback. This switch into the US dollar is unlikely to take place until the second half of 2013.

Investors in all asset classes would be wise to keep a close eye on currency movements because they invariably are lead indicators for movements in other markets.

Commodities

THE decline in the materials index since April 2011 came to a conclusion late in 2012. China's economic growth seemed to have stabilised and the new leaders of the Communist Party are keen to keep the kettle boiling. It would be a brave person to predict metal prices returning to 2011 levels but stabilisation for most materials including iron ore, copper and nickel should be enough to inspire investors into the sector.

Gold

GOLD has very little tangible value and picking its direction is more difficult than getting the Melbourne Cup trifecta. It has become compulsory for investors to own gold since the bull market kicked off about 13 years ago. Gold provides no earnings or yield, but is viewed as a hedge against currency depreciation and inflation. With the US, Europe and Japan printing money, most investors would have forecast gold to skyrocket in 2012. This failed to eventuate.

It is conceivable that gold could get a second wind if the US government fails to come to grips with its "fiscal cliff" and "deficit ceiling" issues. If the legislators can nut out some compromise on these issues then gold's bull run may be coming to a close.

Oil

LIKE gold, oil has performed poorly, falling close to 10 per cent in 2012. The emergence of a shale gas boom in the US and a sluggish world economy has seen the desire to buy oil and oil stocks fade.

The proliferation of gas discoveries in the US and major reserves in China make it difficult to envisage oil going back to the levels experienced in 2008.

matthewjkidman@gmail.com

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