When the market suddenly took off earlier this week, punters got excited and forgot about the woes and trepidations that plagued 2011. Could 2012 be a whopping good year on the Aussie bourse? And is now the time to get in deep?
For those who see the market and life as some sort of pattern, to be repeated, time and again, there’s the January effect – which is a theory that the market goes up more in January than any other month. Some argue that January is a barometer for the year that follows. If January is up, the market will end the year higher.
Unfortunately recent data doesn’t lend much support to this quaint financial theory. For example, last year the S&P/ASX 200 index rose 0.2% in January – but the market tanked by 15% over the accompanying year. The year before, the S&P/ASX 200 index fell by 7% in January, while the market declined by 3% for the year. Going back three years, the S&P/ASX200 fell by almost 5% in January 2009, as the market roared up 31% that year.
Over the past three years, the month of January posted a positive return only once, and it has hardly acted as a barometer for the year to come.
So if we can’t hedge our bets on the January effect, what can we punt on?
There are a couple of standout investment hotspots as we move into 2012, and a number of large black spots, or danger fields.
The new war and oil
Iran is the new Iraq. As a state of the Caspian sea alongside Russia and other former Soviet satellite states like Turkmenistan, Iran is one of the most strategically important oil nations in the world. Oil and gas reserves in the Caspian sea are rumoured to be worth trillions. Ex-US Vice President and former CEO of oil giant Halliburton, Dick Cheney, declared the importance of the Caspian back in 1998: “I can’t think of a time when we’ve had a region emerge as suddenly to become as strategically significant as the Caspian.” Of the five Caspian states, only Iran and Russia have the seaports to export the Caspian’s rich resources.
The military focus on Iran will no doubt affect oil prices, and already oil futures topped their highest level in eight months. One of the biggest bets in the options market in December was oil topping $150 a barrel within a year. Benchmark US crude currently trades at $103 per barrel in New York.
You need look no further than your local paper to see that the news machine is reporting that Western governments are placing an oil embargo on Iran, on top of sanctions targeting Iran’s energy and financial sectors. Iran exports around 2.2 million barrels of oil a day, which is significant enough to affect global supplies.
Clearly, oil sanctions will boost share prices of rival oil giants that secure crucial contracts in Europe, normally the domain of Iranian oil companies.
In retaliation to the embargoes, Iran is threatening to close the Straight of Hormuz, a vital oil route that channels around a third of the world’s oil. And it’s not just jawboning – just two days ago, Iran’s parliament introduced a bill requiring all foreign ships to gain Tehran’s permission to enter the strategic waterway.
Punters are closely watching the latest war build up as an escalation in war tensions may be enough to trigger a significant spike in the oil price. This, clearly, will be bad news for everyone – except oil companies and oil traders that is, as well as traders in other energy commodities such as natural gas and thermal coal.
The price of oil is essentially a tax on every individual globally, including businesses. If oil prices continue to head north, expect a further deteriorating in global conditions as corporate margins shrinks, and increased costs are passed onto customers.
China is the black spot
Although the world is focussed on the travails in Europe, Aussie punters should be watching China. According to the head of commodities strategy at the Bank of America-Merrill Lynch, the biggest fear is undoubtably a hard landing in China. Indeed, if Greece exits the Euro, so be it. If China tanks, we’re all in trouble.
The trend for China is currently down – so a big move up from here would require hefty Government intervention. Last year China’s Shanghai A-shares slid 21.7%, its third-worst annual performance on record. The Hang Seng Index fell 20%.
China’s Premier Wen Jiabao has warned of a difficult start to the year, amid rising concerns over a potential sharp slowdown. ‘The first quarter of the year may be quite difficult,’ Wen told business people to mark the new year, according to a statement by the State Council, China’s cabinet. ‘We are now in a situation where pressure from an economic downturn and high prices both exist,’ he said. Wen added slowing external demand and the rising cost of doing business domestically further complicated the situation when compared with the financial crisis in 2008. ‘We have a relatively cool market. This is the core of current problems,’ he said.
Singapore, often thought as a regional bellweather for Asia due to its deep reliance on global trade and investment, is hardly a shining light either. Singapore’s economy contracted in the last three months of 2011; analysts now argue a technical recession is likely as continued contraction in the first quarter of 2012 would see the economy post two consecutive quarters of negative GDP. Hong Kong, too, narrowly averted a recession in the final days of 2011, growing by just 0.1 per cent.
Aussie equities roadmap
The euphoria of a rally and the temptation to throw your money at sold-off stocks across the board can be hard to resist. But this year, it’s important to ask yourself the following questions:
– Is this stock cheap for a sound reason, or is sentiment the only reason for its share price fall?
– What factors are required for a share price rally, and are they on the cards?
As the global downturn plays out, it’s likely that there will be many more casualties – and the aim this year is to stay well clear of them. Buying sold-off stocks for the prospect of big gains down the track can reap rewards for the patient investor provided that the company stays on course. Companies in precarious industries, producing products that can be easily replicated or substituted, are most at risk.
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.