‘Mixed Economic Messages – Is this a V Shaped Recovery or a Hidden W for equity markets

Economic forecasting is ‘Rocket Science’ which is my way of saying that the forecasters and experts don’t always get it right.  Take for example the latest forecasts below from three major banks, who all have access to the same data and most likely same resources, yet their cash rate forecast for the next 12 months are significantly different, because of human interpretation of the data.  I refer to the variance between all three ANZ’s Dec 2010 forecast is 4%, Westpac’s is 4.50% and St George is 4.75%.  So in short St George are the most optimistic about future growth in the economy and potentially the risk of higher inflation, and ANZ are the most conservative about future growth and the need to raise interest rates as inflation will remain low in their view.

I was speaking with a friend and client of Empower Wealth’s last week about the current economic outlook and how from a lay persons viewpoint  often our immediate view on the economy is driven by how the share market performing. Because markets are live and reported on everyday it’s seen as a quick way of gauging how well or bad things are going.

When the market is moving up and our superannuation savings are growing, we as a population are upbeat.  This attitude is then reflected in market sentiment surveys and ultimately at the cash register through consumer spending figures.  Furthermore, we when spend we create jobs which in turn creates more jobs and more spending.  The perfect economic model.

Yet the market can be a deceiver, because investors are trying to always time their entry and exit into the market.  When they think the worst is over and share market moves from its bottom or lows, investors jump in believing there is value for some of the companies that make up the market.

Recent history has reported that the last bottom was back in March of this year.  Plenty of people have their reasons as to why the market turned and my view was that those with big money that move share values, started to see ‘real’ value in most stocks after the 50% or thereabouts drop since the highs of 2008.  This combined with improving economic data tagged by most as ‘green shoots’ started to build more confidence in entering back into the market increasing demand and driving share values higher.

These positive signs of the world moving away from free-falling markets, which was eroding most investor’s wealth, finally started to see media reports moving from a negative sentiment to a neutral or even more optimistic one, as governments around the world injected huge spending and stimulus to alleviate the financial system meltdown.

So the conversation with my friend and client focused around the idea of – have we here in Australia been too optimistic too soon, as recent economic data from other developed countries, notably the US, which in the last week as reported worse than expected New Home Sales & durable goods, the Federal Reserve’s latest beige book revealed weak consumer spending during late summer and early autumn across most areas of the US and US consumer sentiment was also lower than forecasted.   A further fall in GDP in the UK was also reported this month which makes this recession rank amongst the worst ever.

However late last week US GDP numbers surprised on the upside with seasonally adjusted numbers showing a 3.5% increase in the July to September quarter, thus taking the US out of their recession.  How much of this jump is from their government stimulus is not clear, but positive news is always important for investment confidence.

For Australia, we are looking towards China to be our saving grace, yet in BHP’s recent market update they were somewhat cautious about the short term outlook, as it reported China as completed its stockpiling phase, so future sales will depend on future demand for China’s steel products.  On a positive, its briefing notes mentioned they are starting to see early increased demand for their own steel products.

Further on the positive news front is the leading index measure of the Australian economy produced by Westpac and Melbourne University’s Institute of Applied Economic & Social Research.  It showed an annualised growth rate of 1.7% in August compared with a contraction of 1.0% in July. “The pace of recovery in the growth rate of the Leading Index has been remarkable,” said Westpac Chief Economist Bill Evans. Improved labour market conditions, rising US industrial production, climbing share prices and corporate profits have contributed strongly to the improvement in the index. Evans said the clear signal from the index is that prospects for 2010 are brightening.

So the so called experts have a tough road ahead when it comes to forecasting the next moves in both the Australian economy and the global outlook and based on some of the variances in forecasts we are seeing, I don’t think anyone really know how clear the road ahead is.

My view is that if the share market continues to show a V shaped recovery and share prices continue to grow, then happy days are ahead as the flow on will be positive for all, because sentiment and spending will continue and employment will improve, yet if we have a correction or as my friend called it a ‘W’ shaped recovery, we are still in for further uncertainly on the short to medium term, and that should reduce pressure on interest rates.

Fortunately as a ‘Biased’ property investor, I am less impacted by the markets, and returns this year have been double digit for me already for my property portfolio.  Yet I am very much aware market corrections impact sentiment, employment, income and individuals wealth base, so we all must remain vigilant to ensure our capital asset base (Wealth Base) remains as far away from high risks as possible in uncertain times, and the right investment properties fit this bill for me along with a stable batch of shares in myself manage super fund, (ably guided by my stockbroker, as I know nothing about picking shares, so I leave that to my specialist broker)

Knowledge is empowering……….