26/10/2012 - 10:36

Analysis: Get set for another market shock

26/10/2012 - 10:36

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Analysis: Get set for another market shock

Self-funded retirees, who don’t subscribe to the theory of staying fully invested in the market, may find comfort in the views of Felix Stephens, head of strategy and research at Advance Asset Management.

During a private lunch held in Perth during mid-August, when the Australian All Ordinaries was around the 4200 mark, Mr Stephens correctly predicted that low-yielding cash, sitting on the sideline, would be drawn into the market, driving prices higher.  

But possibly by early to mid-2013, Mr Stephens believes that any future gains could then be wiped out, with markets falling by up to 30 percent.

Mr Stephen’s view that the latest round of quantitative easing by the US Federal Reserve is allowing European governments to "kick the can down the road", avoiding drastic reform needed in the Eurozone, is also shared by Australia's most successful hedge fund manager, Michael Hintze.

While this option is politically the easiest, Mr Hintze warns economically it is the most damaging.

Mr Hintze, who owns and manages the $US11.6 billion (A$11.3bn) London-based CQS hedge funds, also expects China's economic growth to continue slowing, suspecting that the recovery in the rate of Chinese growth may be U-shaped, rather than V-shaped.

The fund that Mr Hintze personally directs is up more than 23 per cent this year and his views on the world economy are closely watched.

His success since founding CQS has lifted him into the ranks of Australian billionaires.

In a market overview issued to CQS clients, Mr Hintze says he feels more cautious about the markets now than he has been for the past three years, because of geopolitical turbulence, questions over growth in Europe and China, and the fact that successive rounds of global monetary stimulus are having smaller impacts.

In mid-October, American hedge fund consultant Michael Belkin, predicted a 30 to 40 per cent contraction in the US stock market over the coming 12-15 months.

Mr Belkin said his forecasting tool suggests the US economy is also being led into a recession by Europe and a slowdown in Chinese growth.

“The US is on the cusp of an earnings season that is going to be a big disappointment. There have been 25 business cycle retractions since 1902 - and we are heading towards the next.” he said.

Financial Times chief economics commentator Martin Wolf addressed a high-level lunch, including James Packer and Roger Corbett, in Sydney recently.

Mr Wolf said that there remained considerable concern that “Greece can still blow everything up, and that the UK’s Gross Domestic Product was 16 percent below the pre-2007 trend, which is much worse than the ‘30s”.

Former WAM fund manager Matthew Kidman says that of a recent survey of 17 local fund managers and stockbrokers, not one believe the S&P/ASX 200 can rally beyond 5000 points.

From a technical point of view, the market has tried to breach this level twice since the global financial crisis, only to suffer a steep descent.

Long-time Maple-Brown Abbott fund manager, Charles Dalziell, says that while a recession in Australia would appear an unlikely outcome, the downturn in commodity prices and the terms of trade forecast to decline by 15 percent by end-2012, may mean challenging times lie ahead.

According to Dalziell, sharp price falls over the past year for many resource stocks have seen such stocks trading at more attractive yields.

However he warns that that due to their strong performance, the valuations of most defensive and higher yielding stocks, including the banking sector, have become stretched.

Normally the sharp fall in commodity prices would usually be accompanied by a declining currency, thus softening the impact on the domestic economy, but to date in this cycle this has not occurred, thus adding to domestic risks.

* Steve Blizard is an authorized representative of Roxburgh Securities.

 

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