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The bull case for shares
This article appeared in the January 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
The 2012 low will launch a 'teens' decade bull market.
By Ian Huntley
This feature is written on the premise of a subscriber asking what could be the key issues, trends and risks in the sharemarket and economy over the next year. It will help readers understand how we approach issues and update advice during the year.
I look at many trends in the context of a decade cycle, which tends to run in the classic pattern of a low point in the first year or, usually, two and reaches a high point late in the decade from seven years and usually later.
My scenario, first put in 2009-10, is little changed. For calendar 2011, I looked to the All Ordinaries index trading between 4000 and 5000 with a 20 per cent chance of upside to 5500 that did not eventuate. I allowed slippage to 3800, which did occur. Briefly, I thought the downturn might stop at 4500 this year.
I expect this trajectory will continue in 2012 with the possibility the market might overshoot a couple of hundred points on the downside but not for long. I have repeatedly said the 2012 low, just perhaps edging into 2013, would launch the "teens" decade bull market. That low would feel bad, with feelings of panic. But just like the post-1987 crash market to January 1991, the market might not fall below previous lows, or at least by much. A breach of those lows would simply engender the panic that creates the bottom.
Meanwhile, you can see the earnings and dividend power building from the forecasts for the top-20 and top-50 indices below. We have fear driving down price-earnings (PE) ratios while the important areas of earnings per share (EPS) and dividends per share (DPS) are on the rise.
Falling interest and monetary stimulus
The major developed world of the northern hemisphere faces a prolonged period of debt deleveraging, as debt is paid off, yet that will come with very low interest rates to at least 2013-14. Most corporates have good balance sheets. Some parts of the world, such as the United States, are doing better, so there is many a market in which to make a good profit.
Falling interest rates and increased monetary stimulation in China, India and Europe will be the order of the day in 2012. The US is likely to extend its quantitative easing program, a form of monetary policy to stimulate the economy, early on. In Europe, central banks are doing a lot to contain the crisis in confidence and I back a muddle-through scenario.
I see little further downside in gold, more likely upside, although the difficulties in Europe imply some countries may sell down gold reserves for much-needed funds.
China is very important. Internal infrastructure investment is likely to be boosted in 2012 and will continue to dominate and underpin commodities demand. Much publicity is given to the residential real estate downturn in upmarket areas in China where private developers are allowed to work. Little publicity is given to the more important building of affordable housing - at a rate of 10 million dwellings a year - as part of the nation's current five-year plan.
A soft Europe slows China's exports because that is its largest market, and a slowing Europe itself will absorb less commodities. But overall I cannot get too bothered; I see no hard landing in China, and I'm still not seeing a downturn anything like the scale of the GFC - no major credit squeeze, no significant inflation.
For Australia I am unsure if there will be further interest rate falls in 2012, but certainly no increases. Weak consumer confidence supports the case for rate cuts, and should Europe's problems grab the headlines we have plenty of room for monetary policy to lower official interest rates. Australia has a major stimulus from the resource investment boom even if we get significant cutbacks in 2012. As with the rest of the world, Australia does not have serious inflation, so there is no need for a credit squeeze as in 2007-08.
Our strategy for some time is to go defensive, using income shares, and two favourites are Telstra and Woolworths. I own both. Our income portfolio is furnished with high-yielding, defensive shares and is proving to be a port in the storm.
Where to from here?
Where the top 20 companies by market capitalisation go, so does the Australian sharemarket. Our estimates for the top 20 give 12.3 per cent upside for 2012 earnings per share and a further 5.0 per cent for 2013; our dividend forecast sees the market's average yield increasing from 4.9 per cent in 2011 to 5.8 per cent in 2012 and 6.2 per cent in 2013.
Those numbers support a potential rise in the S&P/ASX 200 index, possibly to that 20 per cent chance of 5500. But I expect offshore-generated fear to keep the indices down and give investors wonderful dividend yields. That is something I have stressed for some months together with my successful forecast of two 0.25 per cent interest cuts before Christmas.
We kick off with the top-20 index at a 25 per cent discount to our estimate of "fair value" with the All Ordinaries in the mid-4200s. The sharemarket appears cheap; a 25 per cent discount broadly equating to a buy. That discount also tallies with the low market PE. Banks sell on a low PE as they are highly leveraged. The resource shares are currently selling on low PEs because commodity prices are perceived as high and falling. The market is preparing for a commodities downturn as world growth contracts through 2012-2013.
About the author
Ian Huntley is founder of Huntleys' Your Money Weekly, part of Morningstar. Huntleys' 16-page Forecast for 2012, including sector outlooks and detailed report on resources, is available via a trial offer.
The ASX online shares course is a great way to access free education about share investing. There are 11 modules to complete online, each taking about 10 minutes on average. Topics include:
- What is a share?
- Why and how to invest
- Risks and benefits of shares
- What to consider in an investment
- How to buy and sell shares.
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