Rocky ride expected to continue this year

WONDERING how share prices will fare this year?

By InvestSMART · 21 Jan 2012

By InvestSMART ·
21 Jan 2012

Comments

WONDERING how share prices will fare this year?

Nouriel Roubini, the co-founder of Roubini Global Economics, told an audience in New York this week that the global economy faced the same risks that bedevilled investors last year.

That means asset prices could again be tossed around by rising commodity prices, concerns about Europe, uncertainty in the Middle East, and extreme weather events.

So, we could be in for a rocky ride. As Bloomberg points out, the Dow Jones Industrial Average - the benchmark index of the 30 biggest US companies - had four consecutive days of 400-point swings last year, the longest run since 1896.

And since April, the average daily "price move" of the S&P 500 - another bellwether index, comprising the US's 500 biggest companies - has been 1.2 percentage points: close to twice the 50-year average before the Lehman Brothers collapse in 2008.

The Australian sharemarket takes a lead from those indexes.

Meanwhile, the head of international economics at NAB, Tom Taylor, explained why the World Bank's forecast for global growth, revised downwards this week from 3.6 per cent to 2.5 per cent, sounded worse than it ought.

As Taylor wrote in a note to clients, NAB thinks global growth will be 3.25 per cent in 2012, similar to other private sector forecasters. And when measured the same way, the World Bank's forecast is actually 3.4 per cent - greater than NAB's.

"The difference is largely illusory and reflects how forecasts are compiled," Taylor wrote. "And, for those of you who heard the headline that the International Monetary Fund was forecasting a much worse downturn than during the global financial crisis, that was their negative case scenario, not their central forecast."

For the week, the local sharemarket finished slightly higher, up 1.05 per cent on last Friday's close, after relatively positive news from Europe's bond auctions.

Yesterday, the benchmark S&P/ASX200 edged up 24.8 points, to 4239.6. The broader All Ordinaries rose 24.4 points, to 4303.

Energy and materials stocks performed well. Iluka Resources gained $1.33 to $18.16. Woodside Petroleum rose 51? to $33.99.

Meanwhile, the consumer staples sector lost ground, dragged down by Woolworths and Wesfarmers. Woolworths dropped 23? to $24.90. Wesfarmers lost 13? to $30.24. "The broad tone of the market has been supportive this week," a CMC Markets analyst, Ric Spooner, said.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

Will sharemarket volatility continue this year and what’s driving it?

The article says a rocky ride could continue. Economists point to rising commodity prices, concerns about Europe, uncertainty in the Middle East and extreme weather events as the main risks that could keep asset prices swinging.

How volatile were US markets recently and why does that matter for Australian investors?

US benchmarks showed big swings last year — the Dow had four straight days of 400-point moves (its longest run since 1896) and the S&P 500’s average daily move has been about 1.2 percentage points since April, close to twice the long-term pre-2008 average. The article notes the Australian sharemarket tends to follow the lead of these US indexes, so heightened US volatility can translate into Australian market moves.

What did NAB say about the World Bank’s downgraded global growth forecast?

NAB’s head of international economics, Tom Taylor, explained that the World Bank’s headline cut (from 3.6% to 2.5%) looked worse than it should because of differences in how forecasts are compiled. NAB expects global growth around 3.25% in 2012 and, when measured the same way, says the World Bank’s forecast is about 3.4% — so the gap is largely an issue of methodology.

Should investors be worried about the IMF’s gloomy forecast mentioned in headlines?

The article points out that the IMF’s much worse downturn scenario was its negative case, not its central forecast. In other words, headlines about a far worse outcome were referring to a downside scenario rather than the IMF’s baseline view.

How did the Australian sharemarket perform this week and what were the index levels?

For the week the local sharemarket finished slightly higher, up about 1.05% on last Friday’s close. Yesterday the benchmark S&P/ASX 200 edged up to 4,239.6 and the broader All Ordinaries rose to 4,303.

Which sectors and stocks outperformed or underperformed on the ASX in the article’s report?

Energy and materials stocks performed well: Iluka Resources gained $1.33 to $18.16 and Woodside Petroleum rose to $33.99. By contrast, the consumer staples sector lost ground, with Woolworths down to $24.90 and Wesfarmers easing to $30.24.

What did market analysts say about the market tone this week?

A CMC Markets analyst, Ric Spooner, said the broad tone of the market had been supportive this week, helped in part by relatively positive news from Europe’s bond auctions.

What practical signals should everyday investors watch given the article’s outlook?

Based on the article, everyday investors should monitor commodity price trends, developments in Europe and the Middle East, and reports on extreme weather — all cited as risks that can move markets. Also keep an eye on major US index volatility (Dow and S&P 500) since the Australian market often takes its lead from those benchmarks.