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We need a big finish

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by Peter Switzer

At the moment I could be up for an expensive meal at Machiavelli’s if our stock market doesn’t have a big burst between now and the end of the year.

And the arrival of better-than-expected job numbers goes a long way in explaining why our stock market has underperformed this year compared to the Yanks, but it doesn’t mean it will be that way next year.

Our S&P/ASX 200 started the year at 4864.9 and we are now at 4741.3 and that’s a 116.44-point shortfall. At the same time, the S&P 500 went from 1116.56 to 1233, that’s a 156-point gain. So the American investor who played an S&P 500 ETF is up around 10.4 per cent plus dividends, while the Aussie ETF-player is down about 2.5 per cent.

What happened?

So the country that has a strong link to China and the rest of the strong-growing Asian region, which has unemployment at 5.2 per cent and which has a load of business investment in our resources in the pipeline is in the red on the stock market for 2010!

Meanwhile the Yanks which have debt piled sky high, unemployment at 9.8 per cent, consumers who are only now raising their head from the bunkers and an economy which was expected to be in a double-dip recession only three months ago, has gone gangbusters on the stock market.

How can that happen?

Well, simply go back to those unemployment numbers and throw in the team who are most scared of them — the Reserve Bank of Australia and its board.

Rate rises

The surprisingly good, no, great employment numbers that brought 54,600 jobs in November and cut unemployment from 5.4 per cent to 5.2 per cent have been the driving force behind the RBA’s madness on interest rates.

This has worked to drive the Australian dollar up towards parity and this has hurt our stock market.

Many Australian companies not in the fast lane of the mining sector or related sectors, or those hurt by a stronger dollar such as the education, tourism and farming sectors, are wearing a bottom-line effect, which translates to their share prices.

The long-run average exchange rate for the Oz dollar is around 73 US cents but even if we adjust that up for our link to China and India now, which should hold our dollar up, the level is more likely to be closer to 90 US cents rather than parity.

Many companies are wearing a 10 per cent cost slug thanks to the dollar and the RBA.

The year ahead

Next year, if the US economy follows the script of positive economists from the likes of Goldman Sachs, Morgan Stanley Smith Barney and Blackrock, then the greenback could gain some ground later in 2011 and that could push our dollar down.

Also, the quicker the global economy heals itself of sovereign debt concerns, the better it will be for other currencies and that could also push our dollar down.

All we need is the RBA to back off on rate rises and 2011 could be a great year on our stock market. And it is possible, but we will have to watch the job numbers.

“We don’t expect the Reserve Bank to touch official interest rates until at least April 2011 but the chances of an earlier move have increased with the latest jobs data,” said CommSec’s Craig James. “It is always important to note that monthly jobs data is volatile.”

If the US economy improves substantially, the Goldman Sachs’ prediction of a 20 per cent rise in the US market happens and our RBA eases up on interest rate rises, then ETF players in Australia could have a much better 2011 compared to 2010.

For my part, I am still sweating on a big finish for the year for shares or Kumar Palghat from Kapstream Capital will be laughing his way to Machiavelli’s!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, December 10, 2010