The Australian sharemarket keeps soaring to fresh record highs. What’s driving it, will it continue and what does it mean for your super?
The Australian sharemarket has been on a stellar run of late, breaking all-time records three times in recent days and it’s expected to keep climbing higher.
When the Covid-19 pandemic struck, global sharemarkets plunged as it was clear economies were headed for significant recessions – two consecutive quarters of negative growth or in layman’s terms, going backwards.
A recession was officially declared in Australia in September, ending the nation’s record run of 28 consecutive years of economic growth.
It was all looking pretty grim.
So what happened?
The Australian sharemarket and Wall Street in the US – where our local bourse gets much of its direction, with investors keeping a keen eye on how it moves while we snooze overnight – both proved remarkably resilient.
Investors kept piling into shares, having nowhere else to go for decent returns given the high cost of property.
And with interest rates at record lows, stashing money in the bank was clearly not going to earn much.
By January, the Australian sharemarket was back to levels last seen in late February 2020, before the pandemic sparked widespread shutdowns.
The ASX punched through all-time records last Friday and again on Wednesday and Thursday, underpinned by continuing good news of the faster than expected economic recovery, even as government policy responses dry up.
What factors have driven it to an all-time high?
Last year, the “growth” tech sector was booming, with Australian buy-now-pay-later stocks like Afterpay – favoured by younger generations that shun old-fashioned, high-charging credit cards – providing staggering returns for those who got in early.
Stay-at-home and work-from-home tech stocks rode high for obvious reasons.
But the tech sector suffered a major slump in recent months, with analysts attributing this to a “correction” from those earlier lofty valuations that hinged on earnings prospects far into the future.
Consumer discretionary stocks also fared well as shoppers – unable to travel internationally, and buoyed by JobKeeper and JobSeeker payments – spent up on improving their homes.
Lately, the mainstay of the Australian economy – the resources sector – is back in the driving seat as global stimulus packages aimed at pulling economies out of the doldrums fuel demand for commodities.
“China’s economic recovery is driving strong demand for commodities globally,” CommSec senior economist Ryan Felsman noted on Thursday.
“And global infrastructure spending is supportive of mining earnings.”
He noted the Bloomberg Commodity index had jumped 53 per cent in local currency terms from the lows of March 23, 2020, while the S&P/ASX 200 Materials index was up 11.8 per cent for the year-to-date.
Then there’s bank stocks, which are a good indicator of the overall strength of investment.
At the start of the pandemic, there were concerns about people being able to repay loans, but the worst fears don’t appear to have eventuated.
Returns over recent months have been great, with Commonwealth Bank recently piercing the $100 mark.
What does it mean for investors – or my super?
The stellar ASX run is good news for the average Aussie, given everyone has shares as part of their super portfolio.
CBA shareholders will clearly be among those cheering but have been warned by some analysts to expect a retreat, which doesn’t necessarily mean the fundamental outlook or investor sentiment for the business has changed.
It could just be investors selling at a peak price, known as profit taking, to realise their gains. A bird in the hand is worth two in the bush, as the saying goes.
And when shares fall, investors often buy back in “on the dip”.
For superannuation returns, the buoyancy of bank stocks is particularly good news as they tend to be among the “blue chip” stocks that form the bedrock of many diversified super fund portfolios, which aim to achieve solid, relatively stable gains.
Given the strong run shares have had of late, many Australians would expect to see a healthier super balance at the end of this financial year.
So where is the ASX headed next?
It’s hard to predict with any certainty but some analysts believe the 8000 point mark could be next, up from being well into the 7000s currently.
This week’s GDP numbers showing the Australian economy had bounced back to exceed pre-Covid highs – the fastest recovery from recession in 45 years – are buoying optimism the worst impacts of the health crisis could be behind us.
That’s good news for business and if the next corporate earnings season show broadly positive results, the general optimism could continue, spurning more speculation and investment in the sharemarket.
The big uncertainty is of course the virus and the vaccine rollout.
The Morrison government has been widely panned for its slow pace in rolling out jabs, while the success of the inoculations worldwide will be critical to reopening international borders, with travel and tourism sectors still suffering badly.
Another unknown is whether China will keep intervening to dampen commodity prices as it has done with iron ore, creating volatility in the price of the steelmaking ingredient and therefore the share prices of companies that mine it.
China is of course a major wildcard for the Australian economy overall, having slugged our imports with punitive tariffs and bans in a bitter trade war that shows no sign of easing soon.
Axi chief global market strategist Stephen Innes warned earlier this year: “It’s precarious – it’s not going to take much to knock it (sharemarket bullishness) off its axis”.
What is the ASX 200?
Of the more than 2000 companies listed on the Australian sharemarket, the S&P/ASX 200 index tracks the biggest 200, with their size based on their market capitalisation: that is, the amount of shares they have on issue multiplied by their current share price.
Because these companies are market heavyweights, their share price movements can have a big impact, so the index is considered a benchmark for gauging the overall direction of the market.
The other key index is the All Ordinaries, which tracks the 500 largest companies listed on the ASX, so it’s a broader “barometer”.
What are some of the top ASX 200 companies?
The biggest include:
- Rio Tinto
- Commonwealth Bank
- National Australia Bank