Tracking the herd

Australia’s sharemarket was up and down this morning, after yesterday’s ugly 3% fall. It’s not pretty for investors, but for every bearish commentator out there are a host of market watchers who argue that the market is running on fear, not facts right now.

ICAP senior economist Adam Carr, who writes the daily Scoreboard economics column on Business Spectator, is one of many market commentators growing increasingly bemused at the volatile performance of sharemarkets around the world.

Carr argues that the big concerns plaguing the markets – Europe’s debt crisis and China’s potential to overheat – are largely just concerns at this stage.

He says the huge European bailout put in place should work, and argues that the nations of Europe will be desperate to hold the European Union together.

He also argues worries about China are overdone too, and the growth story – driven largely be domestic demand in China – is alive and well.

“Remember that the global economy is recovering strongly; this is the backdrop to everything else that is going on and the good news is that most of the bearish influences we’re seeing are transitory,” he wrote this morning.

Not everyone would agree with Carr, of course. I think Europe will remain a concern for some time and agree with the commentators who have pointed out that for the bailout to work, debt-stricken countries need to put in place savage austerity measures that will still hurt their economies.

But Carr does have a point, particularly in relation to the Australian sharemarket. While the domestic economy does remain patchy, it is improving and local companies should generally do better over the next 12 to 24 months.

Those companies focused on export markets and particularly China should continue to do well. As Carr points out, the global economy is in recovery mode. Europe remains an issue for global markets, but its impact on Australia appears limited at this stage at least.

Of course, it’s clear that spooked investors are looking for more than words to reassure them that their wall of worries is being dismantled.

They’ll want to see real signs that the situation in Europe is stabilising and the bailout is working. They’ll want more evidence that the Chinese Government is not going to suddenly make policy changes designed to slow growth and prevent the economy overheating. And they’ll want this pesky resources super profits tax issue sorted out sooner rather than later.

It’s likely that those reassurances are going to take time, which means nervousness – reasonable or not – will remain.

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