2009 was certainly a positive year for economic activity in Australia, with our local economy faring the best in the developed world.
Being leveraged to China has paid dividends and could set us up for some strong growth in 2010. The size and subsequent manageability of our overall economy has certainly helped the government manage growth prospects through different stimulus measures.
Unemployment
If we start with the domestic picture, forecasts suggest that unemployment has peaked at 5.8% and with consistent job creation we could be heading towards full employment (which currently sits around 5%). This is a stark contrast to the US where the unemployment rate is 10% and if you include those who have given up looking for work, the figure, as many analysts believe, would be closer to 22%.
Retail
Retailers have benefited from Kevin Rudd’s stimulus plan and the RBA’s ‘emergency setting’ rates, with discretionary stocks proving to be the best performing sector of the year. Retail sales grew 7.3% on the year, the strongest pace since the fiscal stimulus June rise of 8.0% year-on-year. Retail sales could be well supported by the strong level of population growth at 2.1% (double the 20yr average) and elevated consumer sentiment.
Interest rates
With analysts expecting the RBA to raise its benchmark rate to 4.5% by mid-year, how much might this weigh on the consumer? It is also important to note that in Australia, total personal debt to income is as high as anywhere else in the Western world. Analysis by Morgan Stanley suggests the consumer’s capacity and willingness to continue borrowing to fund consumption is limited.
Housing
The housing sector looks strong with building approvals up over 12% year-on-year. House prices are also continuing to head north (up double digits in 2009), although some of this can be attributed to the Government tax incentive. Given the growing population, and the supply and demand picture, forecasts suggest that house prices should be supported throughout 2010.
Australian stocks
Analysts predict that stocks leveraged to the Australian economy should continue to perform well and we may see further recoveries in future earnings. GDP estimates among economists vary but some of the more bullish are looking for a 3.5% growth. Forecasts suggest that China, with its insatiable appetite for our raw materials, should continue to grow around 11% in 2010 and 10% in 2011; and longer term China’s economy should triple in size. This will support all things resource in nature. Mixing this with over $70b in Government spending on infrastructure projects and strong foreign capital expenditure could see Australia maintain outperformance in 2010.
Australian dollar
Given it is also an election year it is expected that the Government will pull out all the stops to ensure growth momentum. If our dollar continues to improve (as most analysts expect it to), with the premise to hit parity by mid-year, it will reflect both domestic and offshore optimism about Australia’s growth prospects in relation to our peers.
Equities outlook 2010
As the global economy continues to recover and Asian market growth prospects carry on outperforming relative to Europe and the United States, many analysts believe Australian investors should stay overweight in sectors leveraged to China and other emerging markets. For at least the first quarter of 2010, we may see material and industrial names outperforming banks and other financials as businesses rebuild inventories, re-hire to advance new infrastructure projects and increase capital expenditure initiatives.
Whilst material names in the back-end of 2009 have shown real leadership, they could face more of a struggle in 2010. We have recently seen a number of brokers upgrade commodity price assumptions for this year to bring them more in line with underlying spot prices. We’ve seen this now priced into stocks after subsequent re-ratings by analysts. Whilst being leveraged to China’s growth is still advantageous, the recent developments by the PBOC to curb lending are seen as a potential pot-hole. However, many analysts believe this may be an actual positive as it shows the underlying strength in the economy.
Traders globally will continue to focus on US interest rates and their potential influence on equities. In the short term, the market is concerned that removing stimulus from global economies too early could have grave consequences and could tip economies into a so called ‘double dip’ recession. With Obama seemingly taking on the banks and deficit issues out of the Euro-zone, will these issues continue to weigh on markets and what other black swan events could we see throughout 2010? These are the types of issues traders need to keep in mind throughout the year.
The upcoming February reporting season is also expected to be key to the prospects for equities over the course of the coming year. The recovery we have witnessed in equities over the last nine months has seen PE’s re-rated higher on the back of increased earnings expectations. Companies now have to deliver on their guidance and justify the share price movements they have enjoyed. If companies can meet or beat expectations and provide positive outlook statements, it could provide the catalyst for stocks to move higher. The opposite also holds true.
CFD trading strategies
There are numerous CFD strategies investors and traders can employ to take advantage of the above outlook. They can:
- Trade a huge range of CFDs to create long or short exposures over individual sectors using stock indices;
- Utilise a variety of sector focussed ETFs (Exchange Trade Funds) or commodity specific ETFs;
- Speculate with forex pairs on how the AUD will perform against other currencies; or
- Simply opt to buy share CFDs into equities exposed to pockets of the market they expect to outperform.
Momentum could possibly be a key theme this year as sidelined money continues to pour into the markets. We may see stocks making new highs and continue to outperform in the coming months. Analysts believe investors and traders should look to trade leading stocks in the top performing sectors on the strongest markets. The concept of buy the strength and sell the weakness could be well rewarded.
While the market is firmly entrenched in an uptrend, a number of key risks still remain. For example, the current situation in Greece (should they default) could have a potential negative effect on markets and sentiment. As always, traders and investors should consider using stop losses and have a stringent money management strategy in place. Generally speaking, you should not be risking more than 2–3% of your capital on each trade.
Depending on the investor’s risk appetite, opportunities to benefit from this strategy may be enhanced by leveraging into these positions.
Updated: 29/01/10
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