Green shoots or red herrings?

Spring is a time for rejuvenation and that is what many analysts believe they are seeing in the Australian economy and share markets.

But while the stock market has rallied from the lows of early 2009 there is still debate about whether what is being witnessed is a proper ‘recovery’ or a momentary false dawn before a second slide.

In other words, will the recovery be shaped like a V or a W?

Melbourne Business School associate professor Mark Crosby said he was unsure that the recovery could be characterised by either letter.

“They both imply that fairly soon things are back to normal,” he said.

“The sharp recovery that Treasury forecasts in the budget papers are consistent with most recession recoveries in Australia in the US post-war. But notably, the recovery from the last recession here in Australia was very slow and drawn out and the same was true in the US in the early 90s.

“I expect this recovery to be even slower, due to ongoing weakness in the US and Europe in particular – though we will be helped along by solid growth in China and our good fundamentals. It will be several years before there is proper global recovery.“

While also reluctant to pick the shape of the recovery, E*Trade managing director Stuart Sayers said there was more weight returning to the market.

“I have been surprised at how quickly the share market has responded and I am also surprised there hasn’t been a major correction between January and now,” he said.

“We saw volume drop off very heavily at the end of the financial year and the first couple of weeks of July were also very slow, but at the end of the last week [in August] they have picked up again.

“That says to me that there wasn’t a lot of selling towards the end of the financial year because people didn’t have many gains to offset. Normally you sell to crystallise losses against gains. That also meant that typically there would be a big reinvestment at the start of the financial year and we didn’t see any of that. Again, that is consistent with not having the money from the loss-driven sales and also more uncertainty in the market.

“All that adds up to a picture where the uncertainty is higher and so predicting it is tough.”

Institutional investors wary of re-entering the market too soon would also soon be unable to ignore a sustained recovery, Sayers pointed out.

“It is clear that there is real weight coming back into the market now, which can only be a good thing,” he said.

“On a macro level a lot of the institutions would have been relatively light in equities at the beginning of the year and the longer the rebound run continues, the more necessary it is that they will need to get back in and get exposure to that.

“That should bring a lot of money back into the market, which will bring more demand into the system. Theoretically that should put more upward pressure on price but there are a lot of other factors coming into play there as well.”

Writing in his weekly Eureka Report, Alan Kohler noted that when he started working as a financial journalist in 1970 the All Ordinaries was at 408 and in 1979 the index was at 410 – the point being that share markets can go sideways for long periods of time despite large volatility in the interim.

It would be a long time before the All Ordinaries hits its November 2007 peak of 6833 again, Kohler wrote.

So is the worse behind us or is there another dip around the corner? Analysts agree on only one thing – things will eventually get better.

The only problem is that they still disagree on when and how it will happen