Shares due for a strong finish to the year
Since their highs around April this year, shares have had a rough ride, particularly through the September quarter as the US Federal Reserve and worries about global growth rattled investor confidence.
A good place to start deciphering the sharemarkets is the seasonal patterns in share price movements.
Typically the period from May to September is the weakest of the year.
However, October is known as a "bear killer" month, as it often sees price falls bottom out ahead of seasonal strength going into the year's end and the new year.
Along with a more positive seasonal pattern in the months ahead, there are fundamental reasons for a resumption of the cyclical bull market in shares:
- Shares became cheaper as a result of their falls. This is particularly evident in the Australian sharemarket when you compare the grossed-up dividend yield, which is around 6.5%, with bank term deposits, which are averaging around 2.5%.
- Global monetary conditions remain very easy and, in some cases, are getting easier.
- This in turn should ensure that the global recovery continues, albeit at a sub-par and uneven pace.
Investor sentiment is very negative, which is positive from a contrarian perspective. But what to watch in the month or so ahead? We would nominate the following:
Chinese economic data has disappointed this year. However, there are reasons to believe that risks regarding China may be receding: policy stimulus has stepped up; property prices are rising; recent data has been less negative; Chinese shares are now cheaper than Australian shares; and fears about a crash in the renminbi are receding. Key to watch, I think, will be the Chinese business conditions indicators (or PMIs) for signs that growth is on the mend.
Perhaps the biggest risk associated with the collapse in emerging market currencies and commodity prices is the risk of an "accident" that might be thrown up.
The fear of such, I think, largely explains investors' twitchiness and worries recently around Glencore. Fortunately, Glencore is not a Lehman Brothers - it's much smaller and less connected to credit flows.
The start of a tightening cycle in US official interest rates is often associated with market volatility. Fortunately, the Fed has signalled it is aware of global risks and the impact of this on US inflation. In fact, with inflationary pressures still very weak, the first Fed rate hike looks as if it may be delayed into 2016.
The US will once again hit its congressional debt ceiling in November and will face a government shutdown from December 11 unless Congress authorises ongoing spending.
Both issues could cause more brinkmanship. However, the vast majority of congressional Republicans are more focused on winning next year's elections so a shutdown-debt ceiling crisis is likely to be avoided.
The next big risk in Europe is Spain's general election, where the outcome is uncertain. However, most of the heavy lifting on economic reforms in Spain has already been done. So a euro-threatening outcome is unlikely.
Australian growth is sub-par at 2% and could be for a while, requiring more help from Reserve Bank rate cuts - the RBA's November 3 meeting is worth watching - and a lower Australian dollar. Mining-exposed parts of the country are struggling but non-mining sectors such as housing, consumer spending, tourism, agriculture and higher education are benefiting from lower interest rates and the Australian dollar's fall. There are better opportunities in global shares but the S&P/ASX 200 should make it back to 5500 by year-end.
There is plenty to keep an eye on - as always. However, our broad assessment remains that the cyclical bull market in shares is likely to reassert itself in the seasonally strong months of the year's end.