An Australian Stock Market Outlook For 2020 And 2021

Our Australia stock market outlook for 2020 and 2021 is bullish. We see a very strong correlation between Australia’s stocks and global stock markets. Moreover, we consider commodities a leading indicator for Australian stocks. We expect commodities to end their period of weakness which is bullish for Australian stocks when combined with our bullish global stocks outlook. Based on these leading indicators we add Australia to our bullish outlook in our series of 2020 forecasts. Readers are invited to also look at all our other our annual forecasts. 

As a general observation we have to point out to readers that Australia is pretty aggressive during its bullish trends. There is leverage in this stock market, presumably because of a heavy focus on commodities (volatile in nature) and some very well performing technology (emerging segment).

That’s why we consider an Australia stock market outlook for 2020 and beyond to be of so much value.

If we get it right with this forecast there is plenty of potential to outperform most other global stock markets, for sure the global stock index GDOW (which is one of our reference points).

Australia Stock Market Outlook for 2020 and 2021

Let’s start with our conclusion. Readers who don’t want to understand our underlying forecasting method can ignore the rest of the article.

We believe 2020 will be a bullish year for Australia’s stock market. The conditions for this to be true:

• The AUDUSD will not fall agressively. Ideally it stabilizes around current levels, and goes higher from here in 2020 and 2021.
• More importantly, commodities need to be neutral to bullish for Australia’s stock market to thrive. That’s because of the focus on commodities in Australia.
• Most importantly, global stock markets need to become bullish again, and enter the RISK ON cycle that we are forecasting for a few months now.

These are the criteria for us to make us bullish on Australia’s stock market outlook for 2020 and 2021.

Based on our assessments we forecast that commodities will be neutral to mildly bullish while global stock markets will be bullish in 2020 and beyond.

So InvestingHaven’s research team is on record with a bullish forecast for Australian stocks in 2020 and 2021.

We believe this bullish scenario has a probability of +90%.

When would a bearish scenario kick in? Either if commodities as a group set a lower low or if the Global Dow stock index breaks down. We believe both are very unlikely to happen.

In our Investing Opportunities series we will cover special opportunities in the Australian stock market especially in small cap stocks. What do you have to do to get access to this? Just stay subscribed to the free newsletter service to receive the alerts.

Our Australian Markets Forecast for 2020 and 2021

Below is a summary of our forecast for Australian stock market outlook in the next few years.

Leading Indicators for our Australian Stock Market Outlook

When it comes to forecasting the Australian stock market for 2020 and beyond we look at 3 leading indicators

Leading indicators for Austrlian stock market is the Australian Dollar, the commodities market and the Global Dow stocks index.

We revise all 3 leading indicators, and conclude with projections about the Australian stock market index for 2020 and beyond.

Leading Indicator #1: Australian Dollar

Australia’s own currency, the Australian Dollar (AUDUSD) is the first leading indicator for Australia’s stock market outlook.

We can only work with chart patterns to do a future projection.

The last 20 years saw a remarkable positive correlation between the Australian stock market and the Australian Dollar. Only 3 times in 20 years did we notice a divergence which tended to last 12 to 18 months.

The divergences are indicated with the shaded areas on the first chart.

Currently, it is clear that the AUDUSD has been declining for +18 months. In the same period of time the Australian stock market has declined (early this year) only to strongly rise throughout 2019.

Is there any pointer we get from this leading indicator to forecast Australia’s stock market outlook?

We don’t find sufficient evidence in the AUDUSD as a leading indicator to help with our forecast, so we have to look at our other 3 leading indicators.

Leading Indicator #2: Commodities

The second leading indicator for Australia’s stock market outlook is the commodities asset class.

The rationale behind this is that Australia is a commodities sensitive market. There is lots of mining (base metals, precious metals, rare earths) in Australia. Every time there is extreme bullish or bearish activity in the commodities complex it has a direct impact on Australia’s stock market.

That’s what readers find on the chart below: the Australian stock market index is overlaid by the commodities index. We kept the same divergences (shaded areas) as the one on the AUDUSD chart above.

What becomes very interesting is that the AUDUSD chart now gets an additional perspective. Fortunately, this helps us in our understanding, and consequently delivers meaningful input for our forecast.

The periods of divergence between Australia’s stock market and the AUDUSD can be explained by commodities weakness.

In other words every time Australian stocks diverged from the AUDUSD in the last 20 years it ‘coincided’ with significant (secular) weakness in the commodities market.

Look at 2002 when the global commodities market made a huge double bottom, right before it started taking off.

Also in 2014 when crude oil, the largest commodity in absolute dollar value, crashed 75%.

Today we believe commodities are setting a major double bottom. This doesn’t mean that they will be wildly bullish already in 2020. It likely means that their weakness will end around current levels.

This has a very important insight for our forecast. It means that we absolutely need to see a flat to bullish trend in the commodities space in order to see higher Australian stock prices.

What this also implies is that for whatever reason commodities would break down we can reasonably expect Australian stocks to tumble!

Leading Indicator #3: Global Dow Stocks Index

Last but not least the indicator that helps us a lot is the Global Dow stocks index, short the GDOW.

This GDOW index is a very accurate indicator for our Australian stock market outlook. It really shows an almost perfect one-on-one positive correlation with Australian stocks.

As per our forecast explained in our 16 series ‘Investing Opportunities‘ we expect stocks to get into a RISK ON cycle going into 2020 and 2021. This implies a good outlook for Australian stocks!

Leading Indicators Bullish For Australian Stocks

In sum what did we learn from our 3 leading indicators which help us forecast Australia’s stock market outlook for 2020 and 2021?

The take-away is that commodities are about to end their weak cycle, and prepare for a flat to mildly bullish period. More importantly, global stock markets should turn positive anytime soon.

This implies a bullish forecast for our Australian stock market outlook for 2020 and 2021.

When does our forecast turn invalid? Very simple, either commodities start breaking down or just one major commodity crashes (very unlikely, as we saw crude oil, copper and precious metals crashing hard in the last 6 years). Or global stock markets tumble.

In all other scenarios Australia’s stock market will be bullish.

Note that we did not include any Australian news source or economic forecast as an indicator. For instance investors tend to correlate Australian economics outlook with market action which is not a practice for success.

Price Targets: Australian Stock Market in 2020 and 2021

As a last step in our forecasting process we look at the long term chart of Australia’s stock index to identify some price targets.

As always we use a top-down approach. We start with the monthly chart (long term, 20 years) and then turn our attention to the weekly chart (5 to 7 years).

The monthly chart shows this bottoming process between 2009-2015. In the last 3 to 4 years Australia’s stock index has moved in this rising channel indicated on below chart.

We saw a few months of outperformance around summer 2019.

There is a possibility in which this index will fall back to support, it is even likely it will happen. A cooling off period is good for investors and for markets.

But directionally this chart suggests higher prices for Australian stocks in 2020 and beyond.

If we zoom in we see this rising channel in detail on the weekly chart.

Here it becomes interesting.

We see this index rising on average 20% per year in the last few years. That’s when looking at the mid point of the rising channel, and comparing year-over-year.

So as long as this trend continues which is what we expect given everything we outlined before we should see a 20% rise in 2020 and another 20% in 2021. However, the index is now at the top of the channel, not at the mid point, so we have to adjust for this.

That’s why we believe a fair forecast is for the Australian stock market to rise 20% (base case) to 30% (bullish case) in 2020 going into 2021. This assumes there will be a correction along the way, and we suggest to buy the dip.

Continuous Follow Up on our Australian Market Forecast (free forecasting email newsletter)

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