Economic Review of The Market

Submitted by Jim Thesiger on 22 May, 2008 - 14:14

Here is an Economic Review about the market position from market analyst Macquarie Research Equities.

Is the Market Set to Fall? An Economic Review

After the falls seen earlier in the year it appears that the market is finally coming back towards full health. The last four months have seen the all Ordinaries rise above 15% with many now believing the worst of the credit crisis is well behind us. Despite this Macquarie Research Equites (MRE) feels investors should still tread warily.

In a combination of escalating inflation, combined with loose budget constraints conditions are rife for the market to slip back down and have economic conditions to tighten. This in turn has acted to create an environment where there is little prospect of cost relief, lowering interest rates or improving consumer demand. As a result, MRE feels it can only be a matter of time before earnings per share (EPS) feel the full brunt. The true risk is that FY09 operating margins, and therefore EPS, will decline under the joint pressures of softening revenues and rising costs.

One thing that must be noted is that recent rises in the index have been predominantly driven by a resource boom. The remainder of the market is what investors really need to look at. Domestic indicators are creating a glum picture through weak retail sales, housing starts and consumer confidence. This spreading weakness is backed by corporate Australia’s vagueness in commenting on current trading conditions. This spreading weakness is further evident as consumers struggle under the squeeze of rising food, petrol and other costs and more expensive mortgages.

MRE believe it will be difficult to expand margins as a result of these conditions. Adding to this is the absence of strong top line growth. Although time will tell the general consensus is that investors need to tread warily out side of the resource sector. It must be noted though that rising resource prices will simply act to compound the issues facing the remainder of the market.