Majority of Analysts Agree – “Short Term Correction”

MELBOURNE AUSTRALIA (Markets and Money): As we flew back from Adelaide yesterday evening – a little later than planned after missing our flight! – your correspondent flicked through a copy of the Australian Financial Review, desperately trying to find something of interest to read.

The problem of course with newspapers is that it’s yesterday’s news. Unless the news happens by the time the paper is sent for printing then it doesn’t make it to the papers until the following day.

Seeing as the US markets don’t open until 1am during daylight savings, it makes it especially hard for the printed word to be kept up to date.

So as we made another attempt to avoid reading about the bickering between states about the allocation of GST revenue, we happened to finally notice the headline, “Under 6000, but it’s not ominous.”

Those perfectly timed words would have been typed out barely a few hours before the US market took its biggest dive for several years.

We found it interesting that AMP Capital Investors economist, Shane Oliver, told the AFR, “Resources should also start to benefit from increasing evidence that global growth isn’t collapsing so demand for commodities should remain strong.” He went on, “My feeling is we are going to see some rotation back into resources.”

Either that, or maybe investors are just going to rotate themselves completely out of the market. Usually the argument goes that investors are rotating out (selling) of a position into something else of a perceived better value. However, what is to stop the investors selling stock and then saying “hang on, this other one isn’t that great value either.” Especially if it’s going south.

In the US overnight, the markets bounced back to a small degree, however we will only find out over the next couple of nights whether this is a genuine rebound or whether it is the proverbial dead-cat bounce. In addition, as we head into the weekend, nervous investors on Wall Street may look to neutralize their exposure to the market over the weekend by selling or hedging their positions. This could put some downward pressure on the markets, and the same could happen here too.

Speaking to a number of analysts, Alan Kohler thinks this is a short term “correction,” saying “Unfounded general panic is the greatest time for a sensible investor, a sentiment backed by a string of market observers I spoke to.”

It is good to see that the analysts he spoke to are confident enough to be able to pick precise tops and bottoms of the market. Commsec chief economist Craig James thinks that “we’re looking ultimately at a drop of at least 7%” and that “this is very much the correction we had to have.” Didn’t we tell you that phrase would get bandied around with gay abandon?

Shane Oliver at AMP said “The drop could be 12% but it’s not a bear market; it’s a medium-term opportunity.” We wouldn’t be surprised if they all changed their mind on further falls in the market if the Aussie market puts in even a half reasonable show of resilience today.

Tom Murphy, private client adviser at Deutsche Bank in Sydney told Kohler, “This [market crunch] is a very healthy move, especially in respect of the Chinese markets.” He went on to say, “I think it’s going to be relatively short. I think a number of people are talking about a longer correction but I think we will see value present itself in the next week, particularly in the bulk commodity stocks.”

Continuing the theme of things we had to have, Michael Thomas at IPAC Securities said “I think it is a correction that we probably do need along the way on our way up but it’s also part of an ongoing process by the Chinese authorities to try and take the heat out of their economy.”

As for what could happen over the next few days and weeks, Thomas believes that “… we could get a few more days out of it [market crunch] but I don’t have great fears. If you recall back in May last year we had a similar shake out in stockmarkets, emerging markets, commodity markets – in other words, the riskier end of the spectrum – and a month later it was business as usual. I expect a similar thing this time around.”

So all in all it would seem that everyone can see light at the end of the tunnel. There is apparently nothing to worry about and that this is just something “we had to have.”

Kris Sayce
for Markets and Money

Kris Sayce

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005.
He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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