Saturday, November 17, 2012

Will History Rhyme with '88 to '93?

While updating my spreadsheets today I was almost dumbstruck when looking at the long term BEV (birds eye view) chart of the All Ordinaries Index based on the data from Yahoo since 1984.

Here is the chart that grabbed my attention:

(Every 0 is a new high in the All Ords since 1984, every number below 0 is the percentage that the All Ords is on that date compared to the All Ord index number on the date of the last high.)

1987 was the most recent comparable fall in the All Ords to 2007/09.

After the 1987 fall, it took almost 5 years for the All Ords to hit a sustained new high after the bottom and just over 5 years to hit a new all time high. We are now 3.5 years after the 6 March 2009 bottom.

If 1987 to 1993 was to rhyme perfectly then we are 12 months from a new sustained high from the bottom and less than 18 months from a new all time high in the All Ords. If it rhymes earlier, then it might only be months, or of course it could be later, but our medium to long (3 to 7 years) term outlook is that it will happen.

How could this happen? A couple of ways:
1. Sustained lower interest rates could lead to a slow but constant increase in acceptable PE ratios as investors search for yields.
2. Lower interest rates could drag down the AUD leading to a resurgence in exporting and import competing industries including manufacturing, tourism and education, also maintaining/increasing full employment and leading to inflation.
3. A lower AUD would mean that net profits from overseas operations of Australian listed companies would increase in AUD terms (depending on hedging policies and positions).

While there are still large risks of a Euro breakdown (such as caused by a Greek exit), from an adverse impact of the US fiscal cliff (or the replacement Grand Bargain which would likely still be fiscally contractionary), or from a hiccup in the Chinese leadership succession or rebalancing/end to contraction, this is still well worth watching unless you see Australia as being in the same situation as Japan in 1990 to now.

Volatility is still highly likely as outlooks to European resolution ebb and flow and the fiscal cliff looms, but the medium (3yr) to long (7 to 10yr) term outlook for the stock market if history rhymes is excellent. What has happened to the US S&P 500 over the last 2 years in raw terms could be the template for Australia's next 2 years, provided unemployment is kept around current levels overall (although large sectoral changes are likely as the mining construction boom washes off).

You might also like to look at the last article about why the long term outlook for the All Ords is a buy.

All the usual caveats about not being investment advice etc apply.

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