Turmoil fans bear market fears

The latest bout of market turmoil - this time sparked by worries about the debt levels of several European countries - has sent global asset prices into a tailspin and prompted fresh fears that 2010 will be marked by the return of a bear market.

Australia's benchmark ASX200 share index extended its recent falls, losing 2.3 per cent - or more than $25 billion in value - closing at a three-month low. The Australian dollar also touched levels close to the lowest in a half a year.

While the index is about 45 per cent higher than its lows last March, the latest worries risk capping the market's rebound. Concerns about the US recovery and China's efforts to rein-in wasteful spending have lopped about 9 per cent of the ASX200's value since it nudged the 5000-point mark on January 11.

''With the latest fall in equities, the bear market could be back,'' said  New York-based GFT director of currency research Kathy Lien.  

While a ''bear market'' is typically defined as a 20 per cent fall from a peak, Ms Lien said a trend is becoming visible. ''I think that stocks are headed lower before they stabilise.''

Overnight, investors added Portugal and Spain to Greece among European nations struggling with outsized debts. Late last year, the threat of a default by Dubai battered confidence in the global recovery from a financial crisis in 2008, including in Australia's ability to continue its growth run.

Despite those wobbles, the Reserve Bank today raised its forecasts for economic growth, estimating the economy expanded 2 per cent in 2009, and predicting growth of 3.25 per cent and 3.5 per cent in 2010 and 2011, respectively. It also said interest rates would have to continue to rise this year, just days after surprising analysts by leaving its key cash rate unchanged.

Bears at bay?

Other market watchers say it's too early to call a return of a bear market.

Burrell Stockbroking director Richard Herring says investors should expect mixed economic signals for some time to come.

That balance of negative and positive signals should see the market reverse its recent slide and end the year back near the 5000-point mark.

Even so, "I think it's going to be a fairly problematic year ," he said.

IG Markets market analyst Cameron Peacock says calls for a market correction have been plenty, particularly during the September-November period last year.  

''I think now we may just be seeing something along those lines,'' Mr Peacock said. ''Whether we're heading into bear market territory again, I don't know,'' he said, adding that he was confident it would avoid such a drop.

Despite increasing market volatility, with one measure up 21 per cent overnight, analysts agreed China's growth story remains largely intact. That's likely to be good news for the Australian economy if correct.

China, Australia's largest trading partner, reported growth of 8.7 per cent last year, with forecasts for this year of  an expansion pace topping 9 per cent.   

That said, further signs of cooling in China will contribute to recent falls in commodity prices since that country is the largest consumer of steel, copper and many other raw materials.

The Reuters/Jefferies Commodities Index, a gauge of global prices, slumped 2.6 per cent overnight, the most since August 14, as expectations for growth faltered.

Don't panic

Austock senior client adviser Michael Heffernan also advises investors not to panic.

''You always find the Jeremiahs popping their head up over the parapet and saying it's a bear market, but it's not as I would see it,'' said Mr Heffernan.

The sharemarket was likely to fluctuate near current levels over the coming six months following an unsustainable 50 per cent rise from March to October, he said, adding that the present worries emanating from Europe, the US and China don't pose a direct threat to Australia.

''If you're looking for an excuse to send the market down, you can hang your hat on each of those three pegs. Whether the three pegs are made of anything more than flimsy plastic is something else,'' he said.

Mr Heffernan predicts the benchmark index will be at about 5500 by the end of the year.

Aussie battler

The Australian dollar suffered from the revival of growth concerns overnight, as investors grew allergic to assets deemed risky. It sank to 86.4 US cents before a modest rebound, and remains near six-month lows.

While Europe supplied its share of worries for investors, the US also chimed in with weaker- than-expected US jobless claims data that fanned concern about the health of the world's largest economy, said Suncorp-Metway foreign exchange analyst Nick Jonas.

While acknowledging the strength of the domestic economy, Mr Jonas advised clients to sell the Aussie dollar as stocks and commodities continuing to tank.

If there's a prize for prescience this week, it might go to the Reserve Bank for its decision to pause in its run of interest rate rises, leaving its cash rate at 3.75 per cent.

''Four rate hikes in a row would have been crippling psychologically and economically,'' Ms Lien said. Given weak retail sales for December, ''the RBA was justified in giving Australians some breathing room before tightening monetary policy once again.''

Those international doubts, plus the RBA's own reluctance to pull the rate-rise trigger, have pushed expectations lower about an early rate rise in Australia. Investors were today rating the probability of a March interest rate rise by the central bank at less than a one-in-five chance. Then again, the bank has delivered its fair share of surprises.

czappone@fairfax.com.au

BusinessDay