Aussie Share Market, The ASX Outlook: Problematic

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ASX Outlook - Aussie Share Market Outlook

I happened to catch a glimpse of the popular sentiment yesterday.

Apparently the conversation is shifting towards how high the market will rise as opposed to when it will ‘retest’ the bottom.

And I thought my four-year-old daughter lived in a fantasyland.

Are they dreaming?

I’m usually an optimist when it comes to the stock markets.

For years I said to buy the market for the big bull run between 2012 and 2020.

But not now. My outlook for the ASX — Problematic

I’ll give you three ideas on why. Feel free to rebut me and tell me why I’m wrong.

Over in New Zealand the Reserve Bank has told the banks to start preparing for negative interest rates, potentially next year.

You might think that’s a bit obscure for an Aussie investor. But our Big Four banks dominate that market.

What the Reserve Bank of New Zealand is signalling to bank investors is that it’s preparing to take their business model and put it through the shredder.

Zero and negative interest rates have turned European and Japanese banks into zombie companies that are slowly choked to death.

Why would Australian banks be immune?

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Negative Interest Rates Could Kill the Big Four Banks

Australia’s Reserve Bank identified negative rates as damaging to banks in the governor’s speech on QE last year. Go read it to see for yourself.

Aussie banks could see their NZ earnings shrink in a big way if this were to come to pass.

That’s another problem when they already have an economy in lockdown at home and a loan book full of problems and deferrals.

That’s the first thing.

The second one is even more imminent and urgent.

Now we have the trade spat between China and the rest of the world coming here.

You’ve probably seen the headlines around China placing large tariffs on Australian barley and banning some beef.

Now the word on the street is that iron ore and LNG may not be immune. That would be China getting seriously nasty.

We’ll leave it to the market implications only. Iron ore is critical to the earnings of BHP, Rio Tinto and Fortescue Metals.

It’s one of the few sectors of strength in the Aussie market too (not to mention the royalties and taxes that flow to the WA and federal government).

Australia can ill afford tariffs on this.

Even if it doesn’t come to pass, the threat may be enough to limit any rises in the stocks on the uncertainty alone.

And it’s not the only one hanging over the big resource stocks either.

Another is the potential for further climate change pressure to impact their stocks.

For example, Norway’s Sovereign Wealth Fund is considering dumping BHP stock because of its exposure to thermal coal. This is the type used in the power industry.

That’s not all…

The Australian reported last weekend that the Rio Tinto chairman backed a document calling for a global US$100-a-tonne carbon price.

That would hit the profitability (even viability) of Rio’s operations in different ways.

Will this come to pass? I can’t tell you. But it’s another uncertainly that the market must discount as a possibility.

Think through the implications.

Any further weakness, even another mini panic, and people are going to become exceedingly wary of staying in the market or buying back in. This could cause cash to stay on the sidelines for a long time.

It’s hard for me to see a sustained rise in Aussie stocks under this scenario. People do not like the volatility of the stock market in general.

Any sustained rise in this, not unreasonable to expect in these circumstances, could cause investors to wait for calmer waters.

Such an outcome may even induce money to flow into property for the security alone.

You might recall I spoke to real estate cycle expert Fred Harrison the other week.

One of the points he made is that property is the ultimate store of wealth, especially in times of stress.

The average mum and dad investor may be locked out of property from the weak rental market and tight credit.

But there’s plenty of wealth around the world that’s looking for a safe storage box, more than anything.

Make sure you understand the real estate cycle to see this dynamic in play over the next few years.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

PS: Our publication Profit Watch is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.