The Australian share market is hovering near a seven-year high just shy of the 6,000 point level. But while investors are waiting for further gains, some analysts are suggesting the ASX's next move could be down.
As reported by the Fairfax press on Tuesday, Morgan Stanley believes the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is headed for 5,650 points – a decline of 5% from Tuesday's close around 5,950 points. Fairfax quoted the investment firm's equity strategist, Chris Nicol, as saying: "I just think that the level of confidence is way too high, there is the potential for the wind to come out of the sails for the banks in a similar way as it did to resources."
That wasn't the only piece of bad news being reported by Fairfax yesterday. The media group also said that Australia could be on the verge of '15 years of straight deficits through to 2023-2024', according to forecasts by Deutsche Bank, which could happen if our AAA credit rating becomes compromised.
Of course, Deutsche Bank and Morgan Stanley could both be wrong…
Mining stocks such as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) are firing on all cylinders in response to surging iron ore and oil prices while the nation's biggest dividend payers could be in for a huge jump if the Reserve Bank does happen to cut interest rates when it meets next week. As highlighted by Bruce Jackson, General Manager of The Motley Fool Australia, it appears there is a 50/50 chance the cash rate will fall to just 2%.
That'd be great for companies like Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) – both of which could soar to new all-time highs. The latter might even go on to become the first company to reach the prized $100 mark – it's trading just below $93 right now.
A combination of soaring commodity prices and falling interest rates could certainly be the catalyst behind a huge sharemarket rally which could prove Deutsche Bank and Morgan Stanley incorrect.
… But you need to be prepared
One thing that is for sure is that the Australian economy remains in a fragile state. Unemployment remains high, as do house prices; business and consumer confidence both remain low; the Commonwealth government is getting further into debt and many analysts believe commodity prices still have further to fall. While lowering interest rates may help, there's no way of knowing what will happen next.
Regardless of what happens next week, or next month, it is vital that investors remain prepared for a market correction, or worse, a market crash.
One way to prepare is to ensure your portfolio remains well diversified. That doesn't mean splitting half your wealth between Big Bank 1 and Big Bank 2, but rather spreading your money across a range of high-quality businesses that have the capacity to survive through any market conditions.
While Woolworths Limited (ASX: WOW) is a perfect example, you could also look to buy Burson Group Ltd (ASX: BAP) – a company which provides mechanics with aftermarket automotive parts. As uncertainty creeps back into the economy, you can be sure people will hold onto their older cars for longer, meaning greater demand for Burson's products.
