Has the market bottomed? The Eureka MBA

In many ways it’s the only question that matters to share investors: Has the market bottomed? Last November the ASX peaked at 6800 points. Since the beginning of June we appear to have reached an impasse – the market hovers around 5000 level while some stocks shine (Westpac is up 30% in a month) and other stocks (Babcock & Brown) retest market lows.

Over the next few weeks we’ll bring you the news first: each Wednesday we’ll report the views from 10 of Australia’s leading economists, stockbrokers and fund managers.

The indicator is simple to understand: red lights mean the market has not reached a bottom, amber means the pundit is neutral, green lights mean the market is truly in recovery mode.

This week we kick off the process with (curiously) – a broker, Steve Wright, a fund manager, Ed Prendergast and an economist, Michael Knox – standing alone in the bull pen. They have green lights beside their names.

Three commentators are in the amber zone – economist Chris Caton, broker Allan Furlong, and wealth management specialist Lucinda Chan.

The rest remain “in the red” – they think there is worse to come, but they might change their minds in the weeks ahead. That’s why we think it'll be a cracking read for you each Wednesday. Let’s get going.

Michael Knox
Chief economist, director of strategy, ABN-Amro Morgans

Yes, probably the market has bottomed. The important reason for this is not what is happening here but what is happening in the US. Operating earnings per share for the Standard & Poor’s 500 have risen from $US15.22 in December to $US16.91 in March and a likely $US19.52 in June. This improving path of earnings has finally put the possibility of upward motion back in the US market. Nevertheless, even though a low is probably in place, further tests of that low remain possible in coming months.

Ed Prendergast
Portfolio manager, Pengana Emerging Companies Fund

Yes. The market, especially industrial stocks, reflected panic levels in July based on the US financial woes and high oil price. A vacuum of news ahead of the August results season saw potential buyers hold off. The biggest risk from here is a worse than “soft” landing in the domestic economy.

Steven Wright
Director of fixed interest, ABN-Amro Morgans

Yes. Our modelling suggests the Australian market is about 20% undervalued. We see current volatility without breaks to new lows as a period of consolidation before we move higher into year-end. There will of course be significant disparity in individual stock & sector performances.

Chris Caton
Chief economist, BT Financial Group

The Australian sharemarket has probably bottomed, but it may be several months before we know for sure. The credit market issues should ease slowly, and the oil price is helping. In addition, by any reasonable measure equities are cheap right now. The main issue that the market will have to grapple with in the months ahead is that state of the US economy, which is currently in (undeclared) recession.

Lucinda Chan
Division director, Macquarie Private Wealth

The equities market has likely bottomed, with strong support seen at the 4800 level for the S&P/ASX 200. A significant amount of bad news has been factored into share prices recently, including the impact of a slowing domestic economy and fears that banks' exposure to bad loans has been underestimated. Valuations are attractive, which is seeing buyers move back into the market. There are still some short-term risks, with the reporting season likely to see companies providing downbeat results. However, now that the Reserve Bank has strongly signalled the next move in interest rates will be down, confidence is likely to increase that the worst has passed.

Allan Furlong
Manager client services, Joseph Palmer & Son

Maybe. The fallout from the subprime lending crisis continues and because of lower commodities markets and a very negative sentiment generally, our market lacks conviction. However, value is emerging the finance and property sectors although we don’t expect any significant recovery until the circuit breaker of a cut in domestic interest rates is announced.

Saul Eslake
Chief economist, ANZ Banking Group

No, I don't personally believe the market has yet bottomed. The global “credit crunch” is by no means over; the bottom is not yet in sight for the US housing market; and the coming economic slowdown is yet to be reflected in estimates and forecasts of corporate earnings, globally or here in Australia.

Craig James
Chief economist, CommSec

No, we can't say for certain that the market has bottomed. We are sceptical whether all the bad news on the US credit crunch has come through. And the retracement of commodity prices could end up going too far: overshooting on the downside after overshooting on the upside.

Roger Montgomery
Chairman, Clime Capital Limited

No, consumers drive economic growth in this country and are being hit on all sides. It will take at least a year to rebuild their equity and for any hope of a salary increase to help them get used to higher daily expenses. Asset prices on balance sheets also need to be revalued lower to take into account higher risks and rates. Therefore any rally in the market within the next six to 12 months is likely to be knocked on the head.

Shane Oliver
Head of investment strategy and chief economist, AMP Capital Investors

No. Shares have recently put in a good bottom with the 4800 for the Australian market providing strong support. Further short-term gains are likely helped by falling oil prices and the prospect of lower interest rates. This may have been it for the bear market but on balance our view is that further lows are likely in the months ahead on the back of more bad economic news and profit downgrades. We expect a strong rally later this year though. So investors will need to be agile.