The expectations of stock markets are impacted by macroeconomic trends and cycles.
Global Economic Outlook
The Australian market is affected by the global economy. Figure 1 below illustrates that the Australian stock market moves in tandem with the major global economies in the world.
Two of the biggest threats to global recovery have been diffused; the threat of the euro area breakup and the sharp fiscal contraction, termed as the “fiscal cliff” in the United States. As a result, financial markets have rallied on a broad front and financial stability has improved significantly.
Global growth is expected to reach 3.75 per cent in 2013 and 4 per cent in 2014. Advanced economy’s activities are expected to increase from the third quarter 2013. United States is projecting real GDP growth at 2 per cent in 2013 and 3 per cent 2014. The euro area appears to have slipped into recession and is expecting real GDP to shrink by 0.25 per cent due to banks having low profitability and capital, constraining supply of credit facilities. Japan will see a fiscal rebound of a monetary stimulus and real GDP is growth of 1.5 per cent.
Figure 1: Five year comparison – ASX 200, DJI, NASDAQ, HIS, NIKKEI 225, FTSE, SSE & S&P 500.
Figure 2.1: Mining charts of the world
Domestic Economic Outlook
Australia’s economic growth is largely dependent on the mining and agricultural sector, with the products to be mainly exported to East Asian countries. In Queensland, the recovery of coal production affected by the floods is taking longer than expected. Queensland coal exports are still below pre-flood levels.
GDP Growth Rate
The slowing of the Chinese economy will have a negative impact on Australia’s GDP. However, Australia’s economic outlook remains positive going into 2014(RBA 2013), with GDP growth projected between 3 to 4 per cent. Figures 3 and 4 indicate that there is a positive relationship between the GDP rates and the stock market, therefore the stock market is projected to have positive growth going into 2014.
Figure 3: GDP Growth Figure 4: S&P/ASX200
The Australian dollar has average 1.034 against the US dollar for the past two years from 2011 to 2013. To bring the overvalued (RBA) Australian dollar down, in May 2013, rates were cut to lessen the effects of the strong dollar on businesses struggling to compete in the global market, the impact is as shown in Figure 5. The dollar is expected to further depreciate in the following year, which will have a contractionary impact. A fall in the exchange rates will lead to a reduction in the profit of foreign investors and it would induce them to withdraw their investments in the Australian stock market.
Figure 5: AUD/USD
Changes in interest rate will have a significant impact on the Australian stock market. When the Reserve Bank of Australia (RBA) cuts the cash rate, it means a lower discount rate of future cash inflows, increasing the present value of investments, a positive impact on the stock market. Banks’ interest rate offered to depositors will be dropped, leading to investors shifting capital towards the share market. Both effects will have positive impact on the share market and is the direction that Australia is heading– gradually cutting interest rates to bring the economy into equilibrium. Therefore, interest rates are expected to continue dropping in 2014.
Part 2 Industry Analysis
The Gold industry is in the Metals and Mining Sector, which is categorized under the Resource Sector. The Resource Sector has always been reliant on the stock market to raise capital required for capital-intensive development projects through investors’ investments. Therefore, investor sentiment is extremely important for the gold industry.
Figure 6: ASX 300 Metals and Mining vs ASX200
Australia is the world’s second largest producer of gold after China; approximately two-thirds from Western