Aussie shares surge to record highs but what comes next?

Investors have big questions after Australia’s share market reached an all-time high today. This is what they can do with their money. SEE THE TOP 10 STOCKS

Australia’s sharemarket has today hit a fresh record high, although investors have some big questions about what comes next.

The benchmark S&P/ASX 200 index reached 6875.5 points during morning trade, beating its previous record of 6851.5 points set back in November 2007, before the Global Financial Crisis.

The index, which tracks the nation’s 200 largest listed companies, was back at 6847 in early afternoon trading, and there are mixed views about where it will go from here amid a tug of war between investor exuberance and economic worries.

AMP Capital head of investment strategy Shane Oliver said the market was up 21 per cent this year, and while he expected it to be higher in the next six to 12 months, it was vulnerable to a short-term correction.

“We are coming into a seasonally weak part of the year, the August earnings reporting season could result in volatility, and there are various risks in relation to trade wars, tensions with Iran and soft economic data,” Dr Oliver said.

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The ASX took longer than elsewhere to reclaim its record high. Picture: AAP

Investors and would-be investors have big questions: Why did it take so long to reclaim the record? Why are our shares at a record high when the economy looks shaky? And what happens next?

WHY THE SURGE?

Catapult Wealth director Tony Catt said factors behind the recent rise included:

• Low interest rates in Australia and globally causing investors to hunt share dividend income.

• A bounce-back by bank shares since the royal commission.

• Strong growth in iron ore prices.

• Australia’s low foreign exchange rate making us attractive for overseas investors.

However, questions remained about whether the Reserve Bank’s recent interest rates cuts would help the economy, housing and employment, Mr Catt said.

“I’m 100 per cent of the view that you need to be cautious, particularly for new investors,” he said.

“There is a flood of money into the sharemarket, which has been described as ‘the only game in town’ but rushing into shares isn’t the panacea.”

A LONG WAIT

Dr Oliver said the 12-year wait between record highs was much longer than US and European markets after the GFC because our Reserve Bank did not cut interest rates as sharply, the resources boom ended and the Aussie dollar had remained relatively high.

“Once dividends are allowed for, as they should be given the higher dividend yields paid by Australian companies, the Australian sharemarket surpassed its 2007 record high way back in 2013,” he said.

CMC Markets head of sales trading Ash Glover said during the GFC other countries “threw the kitchen sink at their economies” but Australia never had to, which kept a lid on our rebound.

Some investors are confused why shares are booming when the economy is weak.

MIXED MESSAGES

Australia’s economic growth is weak, wage increases are anaemic and unemployment has climbed, yet our shares power ahead.

BetaShares chief economist David Bassanese said investors expected more interest rate cuts by central banks.

“There is a view that the global slowdown we are seeing at the moment won’t turn into a global recession because central banks will do what’s required,” he said.

“I do anticipate a pullback of five to 10 per cent but timing that is awkward.

“Valuations are at high levels, but certainly not bubble territory — relatively speaking our market’s still offering good value.”

WHERE TO NEXT?

Shares are commonly valued using price-to-earnings ratios that measure profit per share against the stock price, and on this basis Aussie stocks are overpriced.

But compared with low returns from cash and bond, shares looked cheap, said AMP’s Dr Oliver.

He said a great time to buy was last December when the market had tumbled, rather than now.

“There’s short-term risk because the market is stretched, but I do think it will be higher in six to 12 months,” Dr Oliver said.

He suggested investors could gradually buy into the market over the next few months rather than one big leap.

Investment manager Clime Group’s CEO, Rod Bristow, said interest rates were likely to remain low.

“If that continues there’s a good argument for the market to hold up,” he said.

“At times like these it pays to be careful.”

CMC’s Mr Glover said potential catalysts that could push the market higher included billions of dollars flowing into superannuation.

“Australia’s market has been a laggard — maybe now it’s time for global investors to finally focus on laggard markets,” he said.

“It’s 12 years between highs.”

@keanemoney

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Source: S&P/ASX 200 Index, price move since January 1

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Source: S&P/ASX 50 Index, price move since January 1