Australian equities has been in a bear market after peaking around 5900 in 2015. The decline from the peak was first driven by the weakness in Iron Ore and other base commodities.
The second down leg in fall in the Allord Index was driven by the fall in the banks. The tightening of lending standards through higher capital risk weighting means that future bank earning was thought to be at risk.
While the evidence so far shows the bank earnings can be maintained. There are signs of weakness in the housing market. Our property market forecast is cautious with a downside bias. There are 2 currents tugging at opposite ends of the equity market with outlook mixed at best.
The decline has been cushioned by the fall in the AUD. We feel the lower currency has flowed through sector earnings and that the next leg move in the currency is up.
Our Australian equities outlook is mixed, we are bullish on the Australian dollar. We like the AUDUSD pair but it will be as slow climb towards parity again. The key condition is if bad news stopped coming out of China and the government get its act together.
The AUD does not need a commodity rally to continue to rally. It just need it to stop falling.
Australian Equities Live Chart
The silent rally in the commodity price so far this year caught alot of equity funds off guard. The rally has been chased with market sentiment improving. The rally has reached potential resistance. We are not running full steam bullish until the index shows a higher high.
We will be cautious and are slowly liquidation trading positions. Only long positions that are significantly undervalued by the market are kept. Portfolio is also hedged using specific names that will fall along with weaker housing market and mean reversion play on stocks that has benefited from decline the AUD.