Australian shares hit a milestone on Tuesday, reaching an almost 10-year high after the ASX 200 broke through the 6000 points barrier.
The ASX 200 traded 0.8 per cent higher at 6004 (at 2:30pm AEDT).
Much of Tuesday’s gains are from the mining and energy sectors – which lifted by more than 2 per cent each.
These sectors were the beneficiaries of an overnight surge in commodity prices, particularly iron ore (+5.8 per cent) and Brent crude (+3.5 per cent).
Oil giants Woodside Petroleum and Oil Search rose by 2.6 and 2.1 per cent respectively.
As for the big miners, BHP lifted by 3.1 per cent – its highest level since June 2015 – while Rio Tinto climbed 1.9 per cent.
Australia missing out on tech surge
Although it has crossed the “psychologically important” 6000 threshold, the ASX 200 is still underperforming compared to global stock markets.
The Australian index has risen 5.8 per cent in the year to date, which pales in comparison to the Wall Street indexes – given the S&P 500 and Dow Jones have surged by 16 and 19 per cent respectively in the year to date.
Furthermore, the US market has consistently been hitting fresh records since US President Donald Trump was elected last year, largely over optimism that he will deliver on his much-touted corporate tax cuts.
Another key difference between the Australian and US markets is the size of their technology sectors.
“We practically don’t have a technology sector, hence we’re missing out on those gains,” said Betashares’ chief economist David Bassanese.
“Globally, technology is one of the strongest sectors, and Australia is very underweight in that regard.”
Australian technology companies contribute just 1.7 per cent to the Australian index’s weighting. But it is a very different situation in the US, in which its technology sector makes up 27 per cent of the S&P 500’s value.
In addition, the technology-heavy Nasdaq index has surged by 30 per cent since the start of the year.
“Tech giants like Facebook, Google, Apple have been posting strong profits, which boosted the tech sector, and the overall US market,” Mr Bassanese said.
Are the ASX’s gains sustainable?
The ASX 200 last traded above the 6000 points mark in January 2008, during the global financial crisis.
It also traded as high as 6749 in October 2007.
When asked whether the benchmark index can push higher, back to its former levels, Mr Bassanese is optimistic – to an extent.
His view is that a weaker Australian dollar may benefit the Australian market, as it may result in an “upward revision” for earnings growth.
As for why that matters, Mr Bassenese said: “In the past, the market pulls back whenever Australian stocks reach a 16.5x price to earnings ratio.”
Global inflation, particularly in the US economy, is the other variable he is closely watching.
“Australia is subject to global development so if inflation picks up and central banks need to tighten more aggressively, bond yields rise, and it will see price to earnings ratios correct,” he said.