Wild Ride for ASX200

At the beginning of May, with the end of the 2013 financial year in sight, investors were in a bull market riding a sharemarket that was up 27%.

Since then rapid-fire ups and downs in stocks (see graph below), bonds and currencies confirm investors are responding to the possibility that massive stimulus from the US Federal Reserve is about to be put into reverse.

Investors were put on the back foot by a dramatic sell-off amid signals from the Fed, fears of a recession here and a slowdown in China.

In a matter of weeks the major S&P/ASX 200 index fell 10%, enough to qualify as a technical correction, and at one point almost wiped out gains for the entire calendar year to date.

Wild Ride for the ASX2001

Overall the index is still up 17.3% for the 12 months ending 30 June 30 2013, the best return for a financial year since the 2007 financial year when stocks rose more than 20%.

Looking Ahead

Most analysts think shares in the 2014 financial year will post earnings per share growth of around 10%, while UBS thinks the drop in the $A to US93¢ from $US1.04 will boost Australian companies’ aggregate market earnings by 4% in 2013-14. The slide in the value of the AUD is shown in the graph below.

Close to a third of the earnings of ASX listed companies come from offshore, which means investors can expect around a 3.3% increase to earnings growth over the next 12 months.

Wild Ride for the ASX2002

Valuations are still not overstretched, with the forward price-earnings ratio hovering around 14 times, below the longer-term average of 14.5 times

The big problem for resource stocks and investors is an ongoing fall in commodity prices which then takes away the benefit of a lower dollar. See chart below which shows the sharp drop in commodity prices since 2012.

Wild Ride for the ASX2003

Investors are still going to seek out high-yielding stocks, meaning demand for the major banks and Telstra is going to be high. But with valuations a little stretched after such a great run, even accounting for the recent sell-off, the giddy capital gains might not be replicated in the next 12 months.

Over the 2013 – 2014 financial year volatility is set to continue as there are a number of precarious economic situations looming. Firstly Australia must cope with the end of the resources boom and the drain on economic growth caused by shrinking mining investment. The US economy is recovering and as a result the Federal Reserve looks set to pull back on the quantitative easing that has been boosting the US economy. How well this process is managed could be the major factor driving financial markets over FY2014.  Then there is the slowing Chinese economy and current liquidity crisis there, and of course European debt woes are still far from over. All of this means investors can expect a wild ride again in FY2014.

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