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A December Rally could well be on the cards considering the gross outperformance for the month so far.
2011 has been a terrible year with Australian Markets underperforming against nearly all our international partners despite our stronger economic position. A number of quality companies are under-priced and December could see the performance gap between Australian and US markets close.
It has become clear that the RBA was overly bullish on the Australian business and consumer environment when it made consecutive interest rate rises moving into 2011. It seems they forgot we are affected by offshore pressures and Europe and the US have been largely responsible for Australia’s underperformance this year. The latest (well overdue) cycle of monetary easing is likely to spur buying of quality companies, particularly as we will most probably see another 25-50 basis point drop in the first quarter of 2012.
Let’s compare the U.S. and Australian markets in 2011:
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US Markets have fallen just 2.1% for the year so far and a traditional Christmas rally could see the Dow Jones Industrial Average end 2011 in positive territory. Australian markets, on the other hand, have fallen close to 10%. There is an outside chance the ASX 200 could finish the year within 5% of the 2011 opening but some exceptionally strong resistance levels have to be overcome first.
Technical resistance of 4,352 was reached on seven separate occasions on the ASX 200 in the second half of 2011. Only once did it breach 4,400 and this triumph only lasted a matter of days. On the Dow the magic number was 12,100 but markets are currently holding above that level, which is a positive sign heading into the final weeks of 2011.
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Australian bellwether companies have grown earnings and remain on a strong footing moving into 2012, further contradicting current share prices. Using ValueGain, we can see that Australian banks’ performance, in the face of difficult global conditions, has been nothing short of exceptional:
 
 
With purse strings loosened to some extent by the RBA cuts, investors may be ready to adjust their cautious stance on Australian equities. Companies that outperform in these difficult times could prove to be once-in-a-lifetime bargains at current prices. This rally looks like it might extend beyond December...
Stay ahead of the game,
Lachlan McPherson
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