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came to light. There were two big peaks in May and July. We argue that when fear is high, under-priced markets have a tendency to stay that way. So when fear got back into the “tram lines”, the market took off again. The market has been really well behaved since August. Good fundamentals, low fear, and no over-pricing describe a great place from which to start the next rally. So where are we heading? Our trusty broker forecasts suggest an above-average year ahead. Materials and industrials are leading the way in Chart 4. Except for REITS (Real Estate Investment Trusts, formerly known as Listed Property Trusts) the rest are in a bunch. The energy sector was running with the big boys until the start of December 2010. I never treat these forecasts as gospel. Market volatility dwarfs underlying trends. It is the broad direction and relative sector strength that counts. But to construct a portfolio allocation, it is also important to bring in sectoral volatility and correlation forecasts. Despite the strong showing of materials in Chart 4, one of our sectoral allocations has materials underweight and financials market weight! It depends so much on the relative risk and investors’ tolerance to it - so take care. But perhaps analysts have overcompensated going into 2011. This pullback in expectations leaves a lot of room for upside surprises in the earnings seasons. But the real
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game changer could be the dollar. With the RBA having done its job on rates, and so much optimism (at last) in the US, it won’t take much for our dollar to take a tumble. When? That depends on when the Fed feels strong enough to talk about a brighter future for the US - unlikely before mid-year. Since arguably our market underperformed the US because of our dollar appreciation - the difference in the market growths is just about equal to the dollar appreciation - we might get back the lost ground on top of our fundamentals. If we can get a 10 per cent or more kick just due to currency depreciation, with strong (but not massive) growth in the market fundamentals, there should be a great 12 months starting sometime not too far away probably starting somewhere in the second half of 2011. Of course moods can change quickly. That’s why I update my charts daily. So my gut feel is for a good 2011 and a great 2012!
Ron Bewley is an executive director of Woodhall Investment Research www.woodhall.com.au