Reuters Australia
Australian sharemarket stages "dead koala" bounce
Monday August 11, 08:30 AM
SYDNEY, Aug 8 (Reuters) - Australia's sharemarket finished on Friday with its second weekly gain in three months but analysts and fund managers suspect the rebound will prove short-lived.
Lingering worries about key banks suffering further losses due to the unhealthy state of credit markets, slowing economic growth and commodity prices pulling back from record highs all point to a market that is going to muddle along at best.
"We've had a bit of a rebound this week, helped by the prospect of lower interest rates, but the fear is it will turn into a 'dead koala' bounce," said Eric Betts, an equities strategist at Nomura Australia.
Australia's central bank on Tuesday signalled the possibility of a near-term cut in its official cash rate, now at a 12-year high of 7.25 percent, as recent indicators pointed to a rapidly slowing domestic economy.
The benchmark S&P/ASX 200 gained 1.7 percent this week to end at 4,986.2 but is still down 21.4 percent since the start of the year following an 11.8 percent gain in 2007.
Earnings reports in coming weeks are likely to be accompanied by subdued outlook statements while commodity prices are vulnerable to a slowing global economy, said Betts.
"What we're seeing is central banks focusing more on growth than inflation and that says to me the situation is really bad -- the economic outlook has worsened to the point that they're prepared to cut rates rather than tackle high inflation so it's not normal times."
The weak economic outlook means companies will struggle to maintain earnings growth.
"Through the reporting season, expectations of a profit rebound in 2009 will be dashed and 2010 may be the earliest for a rebound in profits," said Betts.
He expects the credit crisis to persist for some time and says it is likely that there will be further revelations from major Australia banks of exposures to bad debts.
Australia's largest lender, Commonwealth Bank of Australia Ltd (CBA) (ASX: CBA.ax) , reports its second-half results on Wednesday. There is some concern that CBA is under-provisioned.
"We believe the asset quality risk for the stock remains quite high as we remain in a deteriorating asset quality environment," Merrill Lynch said in a research note.
Robert Patterson, managing director of investment firm Argo Investment Ltd (ASX: ARG.ax) , said he was not prepared to guess where the market was heading.
"Who knows the future direction? It's those sort of things that come out of left field that makes it hard to predict," said Patterson, referring to the possibility of more big losses resulting from the credit crunch.
He said the financial-services sector appeared to be stabilising but there was now concern about the resources sector.
"The resources (stocks), which had held up so well, are finding it a bit tougher on concerns of slowing global growth," said Patterson.
Earnings reports are likely to be a key factor determining stock movements in the weeks ahead, though many companies are likely to refrain from making outlook statements.
"You probably won't see many outlook statements - I imagine quite a few companies will hold back but we might see relief rallies if results turn out to be not as bad as expected," said Patterson.
Shane Oliver, head of investment strategy at AMP Capital Investors, was more optimistic and expected a sharp rally into the year end.
"Financials have rebounded solidly, U.S. and global shares have been trending up from their mid-July lows and Australian shares have found strong support around the 4,800 level," said Oliver.
($1=A$1.10) (Reporting by Bruce Hextall, Editing by Mark Bendeich)
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