The Australian share market has ended the 2008/09 financial year down by about 25 per cent, after worries about the global financial crisis and recession slammed investor sentiment and eroded domestic economic growth.
Fund managers and analysts said the pain was not yet over, with stock market gains likely to be hard won over the next 12 months, as investors try to confirm any signs the economy is returning to growth.
But fast or slow, a gain is a gain, and shares are still due to rebound in the new 2009/10 financial year, after two consecutive years of falls in 2008/09 and 2007/08.
However the most recent declines mean shares are reflecting good value, offering yields higher than fixed interest investments or cash, particularly after the central bank began cutting the cash rate last September to stimulate the economy.
The benchmark S&P/ASX200 index finished 2008/09 on Tuesday down 24.2 per cent at 3954.9 points, from 5215.3 on June 30, 2008.
The broader All Ordinaries index slumped 26 per cent to 3947.8, from 5332.9 at the end of 2007/08,
Along the way, the All Ords closed at a five-year low of 3111.7 on March 6, and then rebounded as much as 31 per cent to a seven-month high 4061.5 on June 12.
"The easy gains have been seen,'' AMP Capital Investors head of investment strategy Shane Oliver said. "A big part of the rebound was pricing out of the armageddon or doomsday scenarios and we're now at that point where we need more concrete evidence of a recovery.''
Dr Oliver, who helps manage $101 billion of assets at AMP, sees the market reaching about 4500 by the end of calendar 2009, then rising to 4750 by the end of the 2009/10 financial year.
He said the market was likely to move sideways for the next three months, then start rising in the 2009 December quarter onwards as clearer signs of the economic recovery emerge.
Australia's share market has fallen together with markets around the world since the onset of the global financial crisis, which originated in investments backed by high risk sub-prime mortgage loans.
Credit rates surged then stayed high, making it harder for companies to refinance debt, and sending many to the wall.
The crisis really worsened last September when US investment bank Lehman Brothers went bankrupt and the US and several other government were forced to take stakes in some of the world's biggest financial companies to prevent their collapse.
The All Ords had slumped a total 55 per cent by March 2009 from the record high 6,853.6 on November 1, 2007, making it the second worst bear market ever after the 59 per cent drop recorded during 1973 and 1974.
"Post Lehmans, the market went into freefall with credit markets closed up and fear that we might not get out of the mire,'' Tyndall head of equity investments Bob Van Munster said.
Mr Van Munster, who helps manage $3.7 billion of investments at Tyndall, said growth in developed economies would be slower than average, because of high private debt levels and stocks were unlikely to gain quickly either.
"What we need is some visibility the earnings are going to improve,'' he said.
Stephen Halmarick, head of investments markets research at Colonial First State - Australia's biggest fund manager controlling about $129 billion - agreed that the economic recovery would be long and hard because of the debt levels.
"It's going to be a slow grind higher (for shares) rather than a continuation'' of the recent surge, said Mr Halmarick.
"The financial systems is still fragile and the flow of credit in the real economy is still significantly less than it was 18 months ago.''
The reluctance of consumers and businesses to borrow money, and the reluctance of many banks to lend money, would combine to slow the economic recovery in Australia, despite lower interest rates, Mr Halmarick said.
The Reserve Bank of Australia cut its overnight cash rate by more than half to three per cent between September and April from 7.25 per cent in August.
That means that investment yields on cash, at 4 per cent, and fixed interest, where the government 10-year bond yields about 5.6 per cent, are returning less than the dividend yield alone on shares.
The dividend yield is now around 8 per cent, including tax benefits from franking, even after the recent jump in shares, according to Tyndall. That is close to levels last seen in the early 1990s, and only twice before that.
"There's still a valuation gap,'' Platypus Asset Management chief investment officer Don Williams said.
The realisation that shares are still under-valued will send the benchmark S&P/ASX200 index to the mid-4,000 level by the end of calendar 2009, said Mr Williams, whose fund manages $1.1 billion in equities.
"At some point, it will grind up with earnings,'' which won't look great for two more half year reporting periods, Mr Williams said.
Equities investment research house Fat Prophets analyst Colin Whitehead also sees the S&P/ASX200 index rising above 4000 by the end of 2009, with gains accelerating after that as signs of the economic recovery become clearer.
Mr Whitehead said now is the time to buy because by the time there's clear signs of an economic recovery, it will be too late.
"A lot of investors are overweight cash but there's no point in being too fearful now because we're already at the bottom of the cliff,'' he said. "History will recognise this period as a historic buying opportunity.''
AAP
