By Patrick Commins
The ASX 200 sharemarket index achieved a key milestone on Tuesday when it closed above 6000 points for the first time since the global financial crisis.
A powerful rally in resources stocks on Tuesday was the prime mover behind the day's 60-point, or 1 per cent, gain in the ASX 200 index, which ended the session at 6014. The last time it closed above 6000 points was in the teeth of the GFC in January of 2008, towards the beginning of what would ultimately be a 50 per cent sharemarket crash.
It was green all the way for the ASX 200 on Tuesday.Credit: Christopher Pearce
The 6000 threshold had become somewhat of a psychological barrier for the Australian stockmarket in recent years after the index came close a number of times only to fall agonisingly short and ultimately drop away. Through March and April of 2015 the ASX 200 moved within three points of crossing 6000 on three separate trading days, and within 15 points on another. The next time it looked close was in April and May of this year, only to fall away again as investors dumped heavyweight bank stocks in response to the government's announcement of a major bank levy.
In the end, the much-anticipated breaching of the threshold happened amid low trading volumes on a day when most market participants were attending Melbourne Cup celebrations and as Victorians enjoyed a public holiday. There was little in the way of fanfare across trading desks to mark the occasion.
Crossing the 6000 line "is a big milestone," said Den Fremder, from UBS's hedge fund sales desk. "There's certainly a buzz around the market - though that could just be the Cup celebrations."
Solid gains in mining and energy stocks were the driving force for Tuesday's push, with mining giant BHP jumping 3.9 per cent and Woodside Petroleum climbing 3.4 per cent. Those gains capped an impressive rally for commodities and resources companies since the middle of June, when global oil prices have jumped 40 per cent and metals have hit multi-year highs.
The Australian sharemarket has rallied by more than 25 per cent since its lows in February 2016. Despite this impressive run, there is little of the euphoria that prevailed the first time the ASX 200 closed above 6000 points in February of 2007.
"The mood now is a lot more sombre now; less excited than it was back then," Citi equity strategist Tony Brennan said.
Perpetual head of investment strategy Matthew Sherwood said: "When you go back to June 2007, the Australian sharemarket had just recorded its fourth consecutive financial-year total return of more than 20 per cent.
"That had never occurred before."
But investors soon learnt that the good times don't always roll on.
The ASX 200 rallied a further 13 per cent to a high of 6829 in November of that year before starting its inexorable decline amid the first rumblings of the US sub-prime crisis that ultimately morphed into a full-blown global financial crisis.
I think there's a potential for the market to go into the low and mid-6000s over the next 12 to 18 months.
Tony Brennan, Citi
"By 2007, we had synchronised overvaluation across equity markets and sectors, economic growth was slowing and monetary tightening had reached a choke point," said Nader Naeimi, AMP Capital's head of dynamic asset allocation. "But it was ignored, because momentum had taken over as the only market driver."
"It took one year in 2008 for the market to give up four years' worth of gains, and after nine years we are still not where we were in 2007."
But analysts were more optimistic about the sharemarket's prospects this time around.
"Australian companies were clearly overearning in 2007 - the opposite is now true," Graham Harman, a senior investment strategist at Russell Investments said. That leaves room for improvements in corporate profitability, and therefore returns.
Citi's Tony Brennan said he expected ASX 200 companies to grow aggregate earnings by approaching 10 per cent in the current financial year, after profits jumped by 18 per cent in the 2017 financial year as the recovery in commodity prices helped miners boost their earnings.
"I think there's a potential for the market to go into the low and mid-6000s over the next 12 to 18 months," Mr Brennan said. He did, however, warn rate hikes by the US central bank and others in the second half of next year, and other tightening measures from the world's monetary policymakers, "is likely to weigh on returns beyond the next six to nine months".
For now, though, investors will be happy to be belatedly participating in a 2017 global sharemarket rally that has accompanied a rare moment of synchronised economic growth around the world.
"Australian companies, and our economy, are benefiting from the improvement in global economic conditions which should be supportive of equity markets over the long term," Toby Warburton, Asia-Pacific head of active quantitative equities at State Street Global Advisors, said.
But with potential hazards on the horizon ranging from geo-political tensions, to the possibility of policy mis-steps as monetary policy is normalised around the world, it's hard to say exactly when we will regain the previous peaks for the sharemarket, analysts said.
"The first point worth making is that it is clear that markets have been driven by a decline in interest rates, and thus it is a reversal in the direction in these rates that is likely to have the most impact on the future direction of markets," Garth Rossler, chief investment officer at Maple-Brown Abbott, said.
And while the achievement of 6000 points was received as a positive signal, most investment professionals flagged that, including dividends, Australian shareholders were well ahead of where they were in 2007.
"Everyone gets a bit hung up on index levels", Mr Warburton said. "However, what investors actually get is returns."
"Assuming you held onto your investments, reinvested your dividends and didn't need to draw down any capital you would have received a 34 per cent return," he said.
"However, those are big assumptions and many would have lost faith along the way."