In the last few months we have seen a number of catastrophic fires hit Australia while at the same time the stock market has also been on fire rising over 5.5% since early November and over 5% in January alone.
We all know that the bushfires will eventually be extinguished but what we don’t know is at what cost to our economy and how this will affect the stock market.
Following is an extract from Wealth Within chief analyst Dale Gillham’s market wrap for the week ending January 17, 2020:
There is no doubt that the bushfires will impact the economy as government funds are diverted to the relief effort. Further, given the severity of the fires in the farming community, we will initially see agricultural output fall along with tourism and lost jobs in the fire impacted zones. So while the economic cost is unknown at this point in time, it is expected to eclipse the impact from the Black Saturday fires at $4.4 Bn. That said, let’s not forget that the ongoing drought in Australia has already had a significant impact on our economy.
We also need to consider the impact on tourism in Australia as graphic images of the bushfires and dangerous smoke conditions are shared with the world, which means international tourists are likely to choose alternative destinations for their holidays in the coming months. All of this will have a flow-on effect to various companies in the stock market.
As with any catastrophe, there are always casualties and with bushfires it is always the insurance and agriculture industries. While insurance companies manage their risk through reinsurance, they are still exposed to these large natural disasters. Farm services and equipment suppliers may also be hit hard.
There are also many service industries supporting the agricultural and tourism industries that will be disrupted. Banks will also be affected as those who have lost their jobs or are temporarily out of work will be unable to pay their mortgages. Consumer spending may also be temporarily impacted.
While all of this is likely to have a negative impact on the Australian economy, I also believe it will be short-lived. Humans adapt to situations and rebuild very quickly, and I believe the economy will be the winner over the next few years, as the relief effort will have a positive impact on the economy.
We will see a boost to construction, roads, power and many other services supporting the reconstruction, which will bring with it jobs and require greater demand for raw materials. On top of this we have the human factor, as people effected will be purchasing all manner of items for themselves and their homes.
With every negative there is always a positive and while the fires have been devastating, the sun will shine again and many positives will come from it.
What can we expect in the Australian share market?
As I have already stated, the Australian stock market has been on fire this month but yet again we are hearing doomsayers come out stating that the market is overheated and to be careful. We have been hearing from these pessimists over the past four years that the market will crash, yet it has risen over 30 per cent during that time. If investors had listened and stayed away from the stock market, they would have missed out on some great returns over the past 12 months given that the All Ordinaries Index has risen over 25 per cent since 1 January 2019.
When it comes to the stock market, we know that the best course of action is to never follow the herd, and right now, I can confirm that the market is bullish and that you should stay with it. I also believe that the market will remain bullish for the foreseeable future as it continues to rise over the next two to three weeks with the next peak likely to occur at around 7,200 points or above.
I am also confident that the market will rise during the first half of this calendar year with my target set at around 7,600 points. Anyone willing to put in a bit of effort will find some very good opportunities to buy and so take advantage of the strong market conditions.