It wasn't that long ago when financial commentators were expecting the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) to hit 6,000 points…
Down 1.4% to under 5,500 points today, that level seems a world away.
Particularly with a bleak outlook for the mining sector. Ripple effects from the slowdown are sure to be felt throughout the rest of the economy over time. That will weigh on the performance of many of the biggest companies listed on the ASX.
The recent commentary and outlooks provided by big bank CEOs said it all. Economic growth will likely stay below trend for some time yet.
Announcing his bank's interim results to the market last month Westpac Banking Corp (ASX: WBC) CEO, Brian Hartzer, said, "While I'm positive about the outlook, the economy is currently in transition and this means that we expect growth to be uneven across different industry sectors and geographies."
He added, "Banking competition will remain intense, including from new entrants."
That does not sound promising for those investors who were anticipating the record profit growth from the big four banks would continue long into the future.
Overlaying the gloomy growth outlook, both Westpac and National Australia Bank Ltd (ASX: NAB) recently announced they intended to sell shares to raise much-needed capital for the expected increases to regulatory capital requirements.
Despite all these concerns shares of both banks still trade at elevated valuations. Of course, they both offer large dividends but at today's prices the risk of capital loss (from a falling share price) is real in the near-term.
The same could be said for Rio Tinto Limited (ASX: RIO), Australia's largest iron ore producer. We've been calling a slowdown in the iron ore sector for a number of years. However, it's not just iron ore.
Coal, copper, oil and uranium prices are also depressed and will likely constrict the profit margins of many major mining companies for some time yet.
Those bullish on Rio Tinto believe that due to its title as the world's lowest cost iron ore miner, it will survive no matter what the market prices of its commodities. However, surviving does not equal market-beating returns.
Buy, hold or sell?
Given the bleak economic outlook and already inflated share prices, the truth is the ASX may not reach 6,000 points in 2015. In fact, it wouldn't surprise me at all.
Take the three above companies as examples, none appear compelling investments at today's prices, yet they account for almost 15% of the ASX 200 when combined. Personally, I'd rate shares of Rio, Westpac and NAB as a hold, at best. Investors seeking dividend income should look to other stocks to fulfil their needs.
