Uncertainty now the only certainty

Published in the Sunday Telegraph, July 2010 by Andrew Carswell

While their crystal balls and financial charts remain both clouded and puzzling, sharemarket analysts and economists remain convinced of one dead certainty heading into a new financial year: Volatility will again be king.

Despite sharemarkets surging more than 9 per cent in the last 12 months, investors are nervous about the direction of the global economy, having already been burnt by the vicious swing in fortunes on equity and currency markets in what some say was the toughest year in decades for picking the best-performing stocks.

Most of the wild swings on sharemarkets have occurred in the first six months of 2010 after a steady and strong season of rises in the previous six months.

Since the market topped out above 5000 points on April 15, the sharp return to downward volatility has seen 14 per cent wiped from the value of shares - about $200 billion.

The past fortnight has been particularly devastating, with an eight-day run of losses only broken on Friday by a minimal 0.05 per cent gain to 4264.9 points on the back of the Federal Government's announcement of a new, watered-down Minerals Resources Rent Tax.

Those losses are likely to continue into the coming week after Friday night's 0.5 per cent drop on the Dow Jones, which was inspired by a fall in employment in June for the first time this year.

Many market analysts believe bearish sentiment will hover over the market for a few more weeks before a more sustained recovery.

"Again this week the Australian market has been far from impressive, with the past two weeks wiping out the gains since the May 2010 low," Wealth Within analyst Date Gillham said.

"This suggests the psychology of our market is now much more bearish than bullish and so we need to reassess our thinking. Given this, we need to look at the possibility that the market may now fall away for a further four to six weeks to 4000 points or below."

Not all have a bearish short-term outlook. Clifford Bennett of Herston Economics said dips in the market presented buying opportunities that were quickly rewarded.

"Thank goodness that's over, and another fresh financial year begins. We are close to the bottom of this medium-term corrective phase; it could even occur this week," he said. "We continue to characterise the current down moves as pact of a major consolidation phase after the volatility of both the collapse and the initial recovery to the GFC."

What is clouding the judgement of many analysts and investors is the emergence of a three-speed global economy that is making it increasingly difficult to predict trends and trade on certainties.

As the world clambered out of the GFC last year, a well defined two-speed economy was prevalent - the undiminished strength of Asia, which continued to grow at pace, and the combined US, UK and European economies that plunged into a deep recession.

In the past few months, the American economy - white still fragile - has outpaced Europe and the UK, placing itself smack in the middle of a runaway Asian growth story, and a dead European economy now drowning in a sovereign debt crisis.

JPS Melbourne analyst Alex Moffatt said such a global divergence of growth bred volatility.

"The extent of these concerns and the global reduction in risk appetite are unlikely to be unwound in the very near term, so volatility should remain for a while," he said.

"However, the continued recovery in some key economies, as well as Australia, should help see markets stabilise over the medium term - and eventually return to their recovery trend from the lows reached in March 2009."