Expected earnings downgrades and the possibility of further debt financing difficulties mean 2008 is shaping up to be a difficult year, according to leading market analysts.
Head of investment markets research at Colonial First State Hans Kunnen said that while the domestic economy should underpin activity, the US sub-prime issue is still causing problems with no signs of abating any time soon.
“In fact, it’s likely to get worse before it gets better as more loan defaults emerge,” he said.
“The US economy is slowing. The big question is how far the financial sector losses will drag down the rest of the economy.”
According to Kunnen, losses associated with sub-prime mortgages weighed heavily on US financial companies in December. Merrill Lynch fell 10.4 per cent, Citigroup was down 11.6 per cent and Bank of America was down 9.3 per cent.
“In a slowing economy it is much tougher to lift earnings. A cut in the US Federal Funds rate by 0.25 to 4.25 per cent did little to boost confidence. A government plan to assist some sub-prime mortgagees was also met with a lukewarm response,” Kunnen said.
In December the ever-widening impact of sub-prime continued to stunt the Australian share market.
The S&P/ASX 300 Accumulation index fell 2.6 per cent, while the listed property sector dropped by 6.8 per cent, as did the industrials sector, which fell 5.4 per cent and the financials sector by 2.7 per cent.
Kunnen believes that while 2008 may not be as spectacular as the previous five years, the prospect of reasonable returns still exists.
“The resources boom is still in full swing, but fallout from the US sub-prime problem is likely to hold back global economic growth in 2008,” he said.
“The main issue facing the economy is how to handle the inflationary impact of strong demand. The market has pushed some interest rates higher and that will dampen demand, but the economy is still growing at a rate faster than its capacity to provide goods and services. That means more imports and upward pressure on some prices.”
