Many pundits are suggesting (or is it hoping) that the Australian share market will experience a Santa Claus rally in coming weeks. If it indeed occurs then it will be no more than another short term rally that will have its genesis in herd mentality and it will be featured by low turnover.
As we wish all investors a happy festive season, we believe it is important for investors to focus on the likely events that will occur over the next twelve months to determine their investment strategy and portfolio focus.
Here are our key predictions:
- The Australian cash rate will be the same level as it is today (2%) throughout next year. We do not believe that the RBA will see any reason to vary rates. Meanwhile the US Federal Reserve will move the US cash rate by no more than 0.50% over 2016. It will be a tedious adjustment that will not be helpful to our market, or the deliberations of the RBA;
- The Australian trade account will record a massive deficit and it will peak mid year at close to $40 billion on an annualised basis. Some respite will occur as Australia starts to accelerate its exports of LNG in the second half of 2016 and as the $A weakens further;
- Bulk commodity export prices will remain weak but there will be a recovery in energy prices by mid year. The recovery in oil prices will be due to supply adjustments but the rises will not take prices back near 2013 levels. Our target price is about $60 per barrel;
- The 2016 Australian election will be focussed upon taxation policy and superannuation taxation benefits.Whilst GST will be hotly debated there will be a political consensus regarding a need to change the targeting of superannuation benefits;
- China will undertake another devaluation of its currency as the $US retains its strength in the face of continual monetary policy largesse in Europe and Japan. The Chinese currency adjustment will become a hot issue in the US presidential race leading to claims of currency manipulation;
- The Australian dollar will remain under pressure for most of 2016. Weak commodity prices and weakening private capital investment result in a further stalling of national income growth; and
- Major Australian company earnings will see very moderate growth. Resource profits will remain under immense pressure. Banks will lift reported profits but eps will fall. Shareholders will experience the lowest growth in dividends since the GFC.