You don’t have to believe in Santa Claus to receive Christmas gifts from the Australia 200 index. Solid fundamentals and investment metrics, share market pricing of risks I don’t believe will eventuate, and an improving global scenario point towards a rally into year end – and the index has graciously carved out key support and resistance levels for traders.
Despite this week’s solution to the Greek funding problem, the European economy is likely to contract next year – I estimate by around 1.5%. Its important to note, however, that the risks of a credit market implosion sparked by sovereign debt woes is substantially reduced or deferred.
Economic data in China and the US is unambiguous. The US economy is in recovery, and growth rates in China are stabilising between 7% and 8%. Despite the European contraction, global growth next year is likely to be positive to the tune of 2.5% to 3%. Naturally, this is supportive of share markets.
So, what are the remaining risks? Two stand out – the US “fiscal cliff”, and the weak performance of share markets in China.
Its my view that a negative bias is distorting the market’s view of the US situation. When the Republicans played hard ball in June over raising the debt ceiling, they saw a potential political gain ahead of the election, despite the economic risks. Now, surveys show the political risks are aligned with the economic risks – American voters are likely to punish any party that economically humiliates the US. For this reason I believe the parties will reach agreement – possibly before Christmas.
In China, uncertainty about the direction of the new leadership team and a search for a new head of the People’s Bank of China appears to have rattled local investors – remembering that investment in China by foreigners is difficult. I believe these concerns will be allayed in a fairly short time.
This brings me to the Australia 200 Index. A Price/Earnings ratio around 16 is not cheap – but its not expensive either (the “normal” range is between 12 and 20). However, it is dividend yields that have tempted many investors into the market. At current levels, the index dividend yield is around 4.8% without taking franking into the calculation. Many see this as attractive compared to deposit interest rates.
Australia 200 – Daily
Note the post US election sell off broke the medium term up trend. However, the recent rally not only breached the down trend, it rose through key recent support/resistance at 4,425. The RSI is in neutral territory. Minor resistance sits between 4,460 and 4,470, but my target now the is the resistance around 4,525.
Here’s my trade:
BUY Australia 200 at current prices, stop loss below 4,425, target 4,518.