Finance Finance News Why the ASX is hovering at record highs despite economic doom and gloom

Why the ASX is hovering at record highs despite economic doom and gloom

A graph.
Australia's stockmarket is hovering at record highs; here's how that happened. Photo: Getty
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Not since the global financial crisis decimated the economy has Australia’s stockmarket been as healthy as today – even as economists warn of tough times ahead.

In the past week, the All Ordinaries index – which tracks the 500 largest listed companies on the exchange – has broken records set in 2007, with the benchmark ASX 200 index sitting only marginally below its record.

That’s great news for super fund members, AMP Capital senior economist Diana Mousina told The New Daily, helping to boost fund returns that have averaged 8.8 per cent a year over the past decade.

But the successes of the market seem at odds with increasingly gloomy warnings regarding the economy, and poses the question: How did we get here?

RBA cuts paving the way

Steven Daghlian, a market analyst with Commonwealth Bank’s stockbroking arm CommSec, said there were several factors supporting this sharemarket strength, but the major driver in 2019 has been the Reserve Bank of Australia’s (RBA) rate cuts.

“One of the main reasons that markets have done so well, not only in Australia but in places like the US as well, is because interest rates are so low,” he said.

“When rates are so low, one of the reasons markets become popular is that you get people who are interested in getting higher returns than are available with savings accounts or term deposits, so they turn their attention to the sharemarket.”

Another notable contributor has been higher-than-expected commodity prices, Mr Daghlian added, with iron ore a standout.

“Iron ore is up about 60 per cent this year and that’s really helped the likes of Rio Tinto and Fortescue that rely on iron ore,” he said.

Australia holds the title of world’s largest iron ore exporter, accounting for 15.2 per cent of the nation’s total exports and bringing in more than $60 billion to the economy.

As of July 27, the iron ore price was $US120 per dry metric tonne.

The federal budget did its sums on $US55 per dry metric tonne, with every $US10 increase on that price boosting the country’s revenue by $3.7 billion in the 2020-21 financial year.

Technology companies leading the charge

While the overall market’s 20 per cent year-to-date growth is impressive, it doesn’t compare with the 30 per cent lift that technology companies have enjoyed in the same period.

The strength of these companies has been part of an ongoing trend, Mr Daghlian said, with the sector now in its eight consecutive, positive year.

Controversial buy-now-pay-later service provider Afterpay has been a significant contributor to that, up more than 100 per cent since the start of the year.

That performance comes despite mounting concern over the lack of regulation in the buy-now-pay-later sector (which sits outside national credit laws) and increasing reports of debt problems among users.

The nation’s major banks on the other hand have been “a weight” throughout 2019, Mr Daghlian said, although their performance has been markedly better than last year’s.

Financial stocks (a classification that includes other businesses like insurance companies) is up only 16 per cent so far this year, after falling around 17 per cent in 2018.

“The big four banks are so big that when they move in one direction, the market tends to follow just because of their size,” he said.

“If it wasn’t for some of them, markets would have done much better this year.”

Though the fallout from the banking royal commission might seem like the main factor there, Mr Daghlian said tighter lending rules and low interest rates (which force the banks to shrink their margins) have also played a significant role.

Rate cuts coming, but market hard to predict

AMP Capital’s Ms Mousina said further rate cuts were highly likely, with the only remaining question being when, and how many more times the RBA will lower the already record-low cash rate of 1 per cent.

However, while the latest round of cuts has helped the market to hit new heights, it’s hard to predict whether that trend will continue.

“It’s difficult to say whether these gains will continue. We’ve had a huge rally this year and generally when you see something like this we tend to see some consolidation,” she said.

What’s more, any worsening of the trade standoff between the US and China could have a profound effect on the stockmarket’s success.

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