The worst month on the stockmarket in a year has taken the wind out of investors, with confidence retreating from highs earlier this year amid increasing concern about the global economy and the endgame for stimulus from central banks.
For the fourth year running, the adage "sell in May and go away" held true as offshore investors booked profits from the falling Australian dollar, and yield stocks, such as the banks, were sold amid bets the US Fed may wind back its massive money-printing program earlier than expected.
A spate of profit warnings from mining services and other domestic companies, such as Boral and Coca-Cola Amatil, also pointed to a tough forthcoming reporting season.
The benchmark S&P/ASX 200, which lost 5.1 per cent last month, is expected to open about 1.16 per cent lower today after the Dow Jones Industrial Average in the US slumped more than 200 points on Friday in a volatile session.
Yesterday, the Swiss-based Bank for International Settlements said the rally in global equity markets since late last year had been driven by "expansionary monetary policy", overpowering "overwhelmingly negative" macro-economic news in March and April. In its June quarterly review, BIS said interest rate risk was at a "record high" in most advanced economies after the huge issuance of government bonds, putting banks, households and industrial firms at risk of losses.
It also noted the "spillover" of the historically low official interest rates on currencies, noting the fall in the Australian dollar after the RBA last month joined the so-called global currency wars by cutting the cash rate to a record low to devalue the currency.
The RBA this week is expected to keep rates at 2.75 per cent as a fall of nearly 8 per cent in the value of the Australian dollar last month, to below US96c, has taken pressure off the economy.
Westpac chief economist Bill Evans said while the RBA would "step back and observe", it would ultimately cut the cash rate again in August on its way down to 2 per cent by next year.
The concern about central bank actions on markets was highlighted in the Australian Investors Association investor sentiment survey for May, which shows uncertainty is rising due to the growing fear the market is not trading on fundamentals.
The survey was conducted in conjunction with FNArena, and more than 500 members of the two organisations responded. It found that overall confidence levels remain elevated compared with the lows throughout 2011, but off the highs earlier this year.
It shows average cash levels in investment portfolios have risen slightly since March and the allocation to equities has dropped, meaning many investors escaped the full brunt of the 5.6 per cent market slump since mid-May.
While there is concern the market correction may have further to go, equity strategists are confident the benchmark S&P/ASX 200 can climb back above 5000 points by the end of the year as the fall in the Australian dollar and cost cutting supports company earnings.
The AIA survey reveals a healthy keenness to allocate more cash to equities if opportunities arise, despite more investors believing the market will trade flat for the next six to 12 months.
"We think the local index will edge higher over the balance of the year, helped by rising global equities, a lower Australian dollar and low domestic interest rates," UBS strategist David Cassidy said last week.
He maintained the bank's end of year target for the S&P/ASX 200 at 5250.
Citi strategist Tony Brennan is more bullish, last week lifting his end of year target from 5200 to 5400, and putting forward a forecast of 5600 for mid-2014.
"There seems to be a feeling that the rally could be over, with signs from the Fed that QE3 could be stepped down in coming months. Realistically, the strong gains in the market were almost inevitably going to slow, but we don't think the recovery is over," he said. "Gains can come with the growth in earnings in full-year 2014, which seems to be receiving continuing support from lower interest rates, widespread cost-cutting and, most recently, with the Australian dollar falling."
Last week, Goldman Sachs recommended switching out of the banks and into miners as global growth returns to above 4 per cent next year, helped by growth of more than 8 per cent in China.
March quarter GDP data due on Wednesday is expected to reveal growth of 2.4 per cent, year on year.
