A sharp correction in Australian shares between now and the reporting season in September would not be unwelcome, according to Bell Potter director of research Peter Quinton.
“A downturn of between 5 to 10 per cent doesn’t shake people out of their complacency,” he said.
“But a larger fall, in excess of 12 per cent, will shake people and be healthy for the market.”
There will not be a dramatic fall in the market, however, due to the weight of money moving around, Quinton said.
“The current market is too high and rising inflation could just be the trigger for a correction,” he said.
“This would set us up for a perfect reporting season, which will enable the market to be talked up again.”
Money Management is hearing from advisers that money is being put into superannuation funds before June 30, but it is not being invested at this stage.
There is now a growing feeling that the bulk of the super money will be invested during July and August, which could push the Australian equities market to new highs.
Quinton said the weight of money around hasn’t stopped people investing, but it also doesn’t stop volatility in the market.
“The weight of money will limit downside, but it won’t stop scary dips,” he said.
“People will sit on the cash component of their portfolios until they feel confident to re-enter the market, which may keep returns depressed.”
But the economic outlook looks good, according to Bell Potter, with gross domestic product (GDP) due to rise from 2.7 per cent last year to 3 per cent this year. Next year, Quinton is forecasting 3.5 per cent GDP.
The researcher is still expecting the Australian share market to return 12.7 per cent this year regardless of any short-term dips.
The sector performing strongly will again be resources, although growth in this sector will be in single digits this year compared to the double digit returns of last year.
Quinton said investors should not make the mistake of thinking the resources sector will fall because of a rising Australian dollar. The demand for Australian resources is still strong and people are willing to pay the higher prices due to the dollar.
