Investment clock's mixed messages

By Tony Featherstone

ASX Investor Update asked three experts for their views on the latest update of the Investment Clock, a widely used indicator for understanding investment conditions.

Here is the clock, sourced from Bourse Communications, and the expert views:

The Investment Clock 

Rod North, Bourse Communications

Financial markets are now in the Recovery Phase, with economic data continuing to show that the anticipated improvement in business, consumer and gross domestic product growth is likely to become more positive into 2010-2011. The sharemarket has recovered by almost 52 per cent since its low point of 3109 in March 2009. Who knows, one day we may even see an index of 10,000!

On The Investment Clock we appear to have moved past 7 o'clock towards 8 o'clock, where interest rates reached the bottom of the cycle and are now moving back to a more normal setting. The cash rate is expected to end up between 4.5 and 5.5 per cent in 2010. In recent months there has also been stabilisation in the labour market, with unemployment as a lagging indicator, now likely to peak closer to 6.5 per cent.

Australia has managed to weather the recessionary storm better than most other industrialised countries. Many companies are likely to report sustained or increased earnings after a year and a half of tightening and consolidation in order to be positioned to take advantage of the Recovery Phase. 2010-2011 offers some real prospects for positive GDP growth returning, which will also be assisted by the major economies around the world recovering.

Alan Hull, Author, educator and investor

Once again I need to clarify the use of the conventional investment clock which predates the pro-active use of monetary policy to manage the economy. Hence the clock worked very well when good times led to inflation, which led to rising interest rates and falling asset values. But alas, that was the conventional reactionary cycle of yesteryear and those days are all but over.

Add to that a global stimulus package in the trillions of dollars and frankly, how could anyone tell where we are currently in the economic cycle. The one thing I am prepared to say right now is that we are not out of the woods just yet - the global equity market rally we have just seen looks far more like a relief rally than a renewed bull market

Hence the overall downtrend remains largely intact and looks set to take a hold of the market again. On this basis I think the extreme application of Keynesian economics during 2009 has possibly even made the clock go backwards. I said we were at 7 o'clock a year ago and if forced to make a call now, in my estimation we are somewhere just shy of 6 o'clock, with some hard yards and further deleveraging ahead in 2010.

Toni Case, Managing editor, TheBull.com.au

The big risk for Australia is that, unlike the US and Europe, there has not been a significant downturn here. We appear to have scooted around a recession.

Food inflation is high and, in contrast to the rest of the world, real estate prices have actually risen in many regions of Australia. A commodities boom plus government intervention in the property market has contributed to this, placing us in an interesting position on the investment clock.

The rate-rising bias by the RBA to contain this inflationary spiral is today at odds with the US and Europe, where central banks are keeping rates low in response to deep recessions.

At a quick glance at the clock you might think Australia is sitting at 1 o'clock, accompanied by rising interest rates, while the international economy sits at a little past 7 o'clock, edging towards 8 o'clock. This would put Australia at risk of experiencing the downturn we have not yet had.

However, provided the Australian economy is not too harshly affected by higher interest rates, we are likely to lead the international economy into recovery in 2010 as long-term investors move their funds back out of cash and into the sharemarket.

About the experts

• Rod North is author of "Understanding the investment clock - you road to recovery", available for purchase through the Bourse Communications website.
• Alan Hull is a leading author, educator and investor.
• Toni Case is the editor of TheBull.com.au, Australia's leading trading and investing site. Each week TheBull's free newsletter offers 18 share tips from more than a dozen leading brokers, tailored share portfolios for income and capital growth, plus investing, super and property strategies.

From ASX

Stories on the investment clock in the past 12 months include:

• Investment clock strikes buy
• Trillions buy a little time
• Time for the investment clock

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