May 06

The extreme but possible storm ahead

Attended a Researcher’s conference yesterday which had an interesting line-up of speakers that covered China, the global economy, Small cap stocks, and . The first guy was very impressive, an investment Strategist, he did a “Me-style” global economic presentation (perhaps that’s why I liked him) where the key points were…

  1. Commodity Prices in a  bubble
  2. Australian house prices in a bubble
  3. China must/will slow, given inflationary pressures, and internal asset bubbles
  4. Australian dollar at irrationally high levels
  5. Euro Sovereign crisis must result in defaults for Greece, Portugal, Ireland,
  6. US economy is stuffed and recovery will be slow for many years

Whilst these are extreme views its not difficult to make a case for any of them. His markets forecast was that he was forecasting global shares to outperform Australian shares…fine. BUT, he then articulated that he was still quite confident in the Australian economy, Australian sharemarket and that our interest rates will rise (which is clearly a consensus view).

My comments…how on earth can anyone (and many do) agree on points 1,2,3, and 5 and not think our economy (and sharemarket) is facing a potential perfect storm (I actually put this question in these words to him)? To me unfortunately  his conflict of interest, as a fundie, got in the way of his answer. Either way, I’m also a little concerned about points 1 through to 3 (or even 5 given our reliance on the global banking system…point 6 is a factored in and its likely impact other than to keep the US dollar weak) and the downside risks to our economy and markets. If interest rates do go up, then that could be the catalyst to set off point 2 which could flow into the financial system and the rest of the Aussie economy and therefore sharemarkets. If China slows, as Nouriel Roubini is forecasting along with many others, then the biggest impact on our market will be the impact on point 1 (although aided by a cushioning effect from point 4 also dropping) which could be quite shocking (~35% of our market is Resource based).

I’ll end by quoting Jeremy Grantham from his latest newsletter, “beware the sell-side strategist offering arguments as to why overpriced markets are actually cheap”…whilst the analyst wasn’t necessarily saying assets were cheap he was denying the potential impact of these expensive markets on our own therefore suggesting our market is fairly priced…unfortunately given the downside risk I’m not so sure.

Plenty of food for thought.

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