Shares are tipped to fall over the next month, as poor economic readings overwhelm optimism generated by the March rally.
Wall Street yesterday capped three days in a row of losses, and any number of poor US economic readings may trigger further falls on global markets, said White Funds Management director Angus Gluskie. Some analysts tip a 10% drop to come.
Australian stocks extended their decline today, with the benchmark indexes about 1% lower for the day in recent trading. The S&P/ASX200 index may cap a second week of falls, having so far given up about 3% of its two-month rally to May 8.
A string of recent gloomy reports has tested global investor confidence in so-called economic ''green shoots,'' or early signs of recoveries, as massive government spending to stimulate demand take effect.
These negative reports include yesterday's decision by credit ratings agency Standard and Poor's to cut the outlook for UK government debt, and data out earlier this week showing Japan's economy shrinking 4% in the first quarter of 2009. US debt may also be downgraded, a leading bond investor said overnight.
Mr Gluskie cited US housing figures, the Institute for Supply Management index for May, and the US jobless rate, as numbers investors will watch closely over the coming fortnight to gauge the likely direction of major markets.
Long road back
Even if the recent revival in share markets resumes, investors may have to wait years for profits to return to levels priced into stock values at the market's all-time peak of November 2007, according to Mr Gluskie.
"The rate and scale of this recession are far larger than those other recessions, so I'd suggest it will take five to seven years for earnings to get back to levels they were at in 2007,'' Mr Gluskie said, noting stocks are priced on expected earnings.
Australia's economy contracted 0.5 per cent in the last three months of 2008, and is expected to shrink 0.5 per cent in the 2009-10 financial year, according to last week's federal budget.
Mr Gluskie said if the five-year time frame began in 2007, when the ASX 200 peaked at 6828.7, stocks won't return to those levels by 2012 "at the earliest.''
"We'll see elements of recovery well before that,'' he said. "The market will keep recovering before that but it will take many, many years before we get both fundamentals and stock prices anywhere near they were'' in 2007.
"Realistically, it's going to be beyond 2012,'' Mr Gluskie said.
Negative view
Bell Direct equities analyst Julia Lee said stocks may 10 per cent from their two-month rally peak of 3941 on May 8.
While short-term sentiment is negative and volumes are low, the recent pull-back was largely anticipated by the market, she said.
''An economic recovery will be a slow and prolonged, but looking at the sharemarket recovery it tends to react in bursts,'' she said, raising the prospect that investors waiting on the sidelines may miss out on ''big movements'' upward, which can be as high as 50 per cent.
Looking at the All-Ordinaries index, ''it took almost 10 years for the Australian sharemarket to recover to the previous highs set in 1987, but in the recovery period, there were ample opportunities to profit with some of the movements in the magnitude of 30 per cent.''
In the current climate, ''I think there will be quite a bit of volatility in the market,'' Ms Lee said, creating a `W-shaped' recovery rather than `V-shaped' one.
Those dips, though, will create short-term opportunities for buyers, she said.
czappone@fairfax.com.au
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