warning on 200 billion dollar asx slump

Article in todays West Australian warns of a large correction in our markets due soon. While I agree that nothing can keep rising forever, my fear is that it will be the warnings themselves that will lead to the correction, and not the factors the gurus are warning us about.

http://www.thewest.com.au/default.aspx?MenuID=159

Warning bells ring for a $200b slump
10th February 2007, 8:00 WST


A growing number of investment fund managers and analysts are warning that Australia’s fast-running stockmarket is closing on another sharp correction which could wipe up to $200 billion from share prices.

They say the market is heading for a correction of as much as 15 per cent, but more pessimistic experts fear another crash comparable to 1987 is around the corner.

The market’s S&P-ASX 200 hit a record high yesterday and has now climbed more than 20 per cent since the last big correction sent it 11 per cent lower last May.

The recovery has been buoyed by record liquidity, strong superannuation inflows, steady interest rates and relentless takeover activity.

In the past month alone it has gained 7 per cent, including 1.6 per cent this week, valuing the broader market at $1.35 trillion.

However, many financial players have turned bearish as the index closes on another key barrier, the 6000-point level. They cite concerns about widespread risk complacency and stretched share valuations.

452 Capital co-founder and fund manager Peter Morgan likened the current climate to the lead-up to the 1987 crash.

“If you had a timeline on it, you are going into 1987 but you are not yet in September 1987,” Mr Morgan said.

“There are two things in the big equation, there is firstly a lot of liquidity both domestically and globally and, secondly, risk is being priced at a very low level — both those things are dangerous.

“I don’t think it is a lot different to what happened in the 1980s, but the 1980s boomed for three or four years before the markets corrected.”

Research by the Bank of Canada highlighted yesterday that the Australian equity market was facing a number of headwinds despite being supported by a strong commodity price cycle, a solid domestic economy and high-dividend yields.

The bank said risks to the market included a possible commodity price downturn, higher interest rates and the expensiveness of Australian shares, saying they were now selling at the same price per earnings ratio as global stocks.

Nomura Australia equity market strategists Eric Betts said the reporting season could be a “last hurrah”.

“Once the reporting season is out of the way you will probably have crossed the 6000 barrier and people may take that as a time to reassess their positions,” Mr Betts said, adding that he expects a correction of 8 per cent to 10 per cent.

“My prognosis for the market is that we could well have a pullback in the short to medium term of 10 to 15 per cent but I don’t think we will see the almighty collapses of the 1980s,” Argonaut Securities executive chairman Charles Fear said.

However, Mr Fear warned that flatter commodity prices and rising costs could put pressure on the profitability of the big miners.

Bell Potter Securities director of research Peter Quinton agreed that the Australian sharemarket was over-extended.

“I am very much in the camp that we will get a correction, but I am equally in the camp that it will just be a technical correction of 10 per cent or a bit more,” he said.

TRACEY COOK


GZ