It’s been a bumpy ride…

2006 + 19.03%
2007 + 11.82%
2008 – 41.29%
2009 + 30.85%
2010 – 2.57%
2011 – 14.51%
2012 + 14.6%
2013 + 15.13%
2014 + 1.1%
2015 – 2.13%
2016 ?

Well, the 2016 sharemarket has certainly started with a bang, or perhaps it’s a thud.

Two themes are circling the Australian market, seemingly determined to cause trouble.

Firstly, China’s economy continues to slow. Worse, analysts are increasingly casting doubt on official Chinese data so the picture may be worse than we think, as suggested by the current round of devaluation of the yuan against the US dollar (engineered by Chinese authorities to stimulate the economy).

So the Chinese market kicked the year off by falling 7%, triggering a trading halt… and international hair-pulling… twice in a week. Worse, the only reason the market hasn’t fallen much, much further, is heavy handed government intervention.

This means commodity prices are likely to stay weak, energy prices particularly so as Saudi Arabia and Iran rattle swords at each other, making it even less likely that OPEC will restrict supply to stabilize oil prices.

This is bad for Australia’s mining sector, bad for our trade balance and bad for government revenues. It’s also bad for emerging economies that rely on Chinese demand and commodity revenues (especially the oil producers).

It’s also directly bad for the Australian dollar and share market – which tend to trade in line with commodity prices.

The second troubling theme is the US interest rate cycle. Rates there are on the way back up, which has global implications. When the Federal Reserve was pumping money into the world economy, much of it made its way to emerging economies and now that process will reverse, tightening credit in those countries already suffering from low commodity prices.

The Fed knows all this of course so they’ll be very careful but the danger is that with the deflationary influence of collapsing commodity prices largely out of the system, inflationary pressures will force their hand.

On the plus side,
the Australian economy appears to be doing quite well despite large falls in capital spending by the mining sector, partly no doubt because mining is actually only a small employer of Australians. The big employers are retail, healthcare and financial services, and employment growth actually strengthened toward the end of last year, holding the unemployment rate steady.

The Reserve Bank of Australia expects continued low inflation and moderate (but below average) economic expansion. The global economy is continuing to expand, with US growth and recovery in Europe offsetting softening in conditions in the Asian region.

So what is the outlook for 2016?

In 2015 the Australian share market fell by just over 2% after a 2014 performance of only +1%. In other words the market has gone sideways for 2 years, a pattern that may well continue … but of course it won’t take the most direct route. It’ll likely be a bumpy ride.

Brace yourself for some rough seas.

At the very least, investors should brace themselves for more volatility. The market will be primed to respond sharply to bad news.

Of course, braver investors with longer investment horizons will use periods of market weakness to buy at prices that may well look cheap in a few years time.

What are your thoughts?

Will the market end 2016 higher or lower? Join the conversation — leave a comment below and let us know what you’re thoughts are.
Yellow Brick Road Financial Guru

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