He says the market is undeniably “caught in a storm of macro-economic fears”; and sovereign debt as it currently stands is “an overhang on not only the Australian market but markets around the world”.
“If I look forward, that’s probably not going to be cleared up anytime soon; [it’s] probably going to be with us for a while.
“In fact, if you look throughout history, this is part of the cycle. History tells us [that] when you have a banking crisis, the next thing that follows is a sovereign debt crisis; then following that you get defaults, printing money and inflation.
“These always follow one another [although] it’s not a short-term fix.”
Shining a spotlight specifically on Greece, Briganti says it’s anyone’s guess as to how it will really play out.
“But what we know from what happened last year with the sovereign debt issue and from what happened in the 80s with some of the Latin American sovereign debt issues, is that there’s likely to be a resolution,” he says.
“It’s going to be a combination of a political resolution and a financial resolution.
“So far, we’ve had a positive vote on austerity measures in the Greek parliament and that’s sort of a tick to move in the right direction.
“There’s probably a number of hurdles that still have to be faced, but despite all the press, you actually can’t see a big impact of European sovereign debt issues on financial markets.”
The last key macro concern is the uncertainty of the US economy and the challenges the country has yet to face.
Briganti says the main issues are around ending the second round of quantitative easing (QE2), the prospective debt ceiling vote and discussions about the high unemployment rate in the US.
“A part of that’s political and we think there will be a political resolution,” he says.
“In the end, the republican party will likely pass some sort of increase in the debt ceiling. The QE2 issue has spooked some investors.
“What they believe will happen is that QE2 will end, bond yields will increase significantly and that will derail the US economy where in fact, what we’ve seen is that bond yields have fallen even further and even if QE2 ends and bond yields rise, they’re not going to rise to a level that’s going to derail the US economy.”
Taylor says looking forward, “the US is definitely on a recovery path, but it’s certainly not a straight-line recovery path”.
“You’re going to have ups and downs and continued fears about a double-dip recession,” he says.
“I think the likelihood of the US going back into a recession is pretty low.
“But once again, you’re going to have ups and downs, and that’s going to knock the market around.”
MICRO FEARS
Fears are also being felt from a domestic economy perspective.
The controversial carbon tax scheme has “thrown a spanner in the works”, according to Andrew San, investment analyst, equities, at Aberdeen.
“It’s still unknown as to what impact there will be for the end consumers,” he says.
“On top of that you’ve got the possible interest rate rises as well as the higher cost of living for mums and dads.”
Briganti says there are “still strong headwinds coming from the strong Australian dollar and reluctant consumers” to look out for.
“What that means is that we’ve got this interesting situation within the Australian equities market where you’re likely to see the most cyclical part of the market – that being the resource sector – do well because it’s linked to global economic growth; but there’s going to be a group of sectors that are going to struggle because of the strong Australian dollar and the reluctant consumer.
“So the other end of the spectrum, which is the very safe defensive sectors like consumer staples and healthcare, is going to be sought after within the domestic market,” he says.
“It’s almost the extremes. The most cyclical and the least cyclical are the areas that we believe are going to do well within the next 12 months.”
Aberdeen’s Penaloza says both micro and macro trends are not helping business confidence in Australia.
“I think certainly we haven’t seen any domestic catalyst that’s going to underpin domestic sentiment here, and certainly what’s happening outside of Australia, what’s happening in Europe, what’s happening in China is slowing down as well,” he says.
“For the rest of the year, we would say there is an element of cautiousness across businesses and across consumers.
“Looking into next year, what we would like to see really is a bit more clarity with regards to taxation, government policies, housing affordability et cetera in Australia.
“At the moment investors are just sitting on the sidelines and just waiting to see how much more expensive is it going to be to live.”
MARKET OPPORTUNITIES
Despite the less than desirable global state of affairs, the uncertain market still presents opportunities to maximise investment performance.
Briganti says that the opportunities can be found “from where you see the most earnings certainty”.
“So I believe that earnings certainty exists with the resource companies because we believe the world is going to pick up,” he says.
“Earnings certainty is more problematic with some of the more domestically-focused companies.
“So where else can you get earnings certainty? You get it from the stocks that pay relatively good dividends, from the defensive sectors. Consumer staples won’t give you a fantastic return but they will give you a nice safe return – Woolworths and Coca-Cola.”
