S&P/ASX 200 jumps 1.3% to record high close

The ASX hit a record-high close on Monday but analysts say there’s more to come.

Source: Bloomberg

Australian shares have surged to a record closing high, marking a wild 14-month comeback driven by ultra-low interest rates, massive government spending, a commodities boom and an investor army flush with cash rushing in to bet on a COVID recovery.

Marking its biggest one-day rise in the past 10 weeks, the S&P/ASX 200 benchmark index closed up 92 points or 1.3 per cent to 7172.8 points – slightly above the previous record high daily close of 7162.5 and slightly below the intraday record of 7197.2, both of which were set on February 20th 2020.

After surprisingly-soft US jobs data bolstered hopes of sustained monetary policy support from the Federal Reserve and iron ore and copper prices also hit record highs on Friday night, the local bourse was underpinned by news of record-high business conditions and confidence, as well as more signs of burgeoning takeover interest as a bidding war erupted for James Packer’s Crown Resorts.

Having dived as much as 39 per cent in early 2020 when the global spread of COVID-19 began to cause widespread lockdowns, the Australian share market fully recovered after bouncing 63 per cent from a 6.5-year low of 4402.5 points in March 2020.

However it continues to lag the US share market where the S&P 500 is hitting records on a weekly basis.

The Australian market “still has far to run”, said Russel Chesler, Head of Investments and Capital Markets, VanEck Australia. He predicts a rise to 7,500 points in coming weeks and 8,000 by year end.

While broadbased, Monday’s rise was led by the heavyweight materials sector.

BHP rose 3.1 per cent to a record high of $51.65 a share, Rio Tinto rose 4.6 per cent to a record high of $132.94 and Fortescue Metals rose 7.9 per cent to a two-month high of $24.79.

Miners surged after the spot iron ore price rose 5 per cent to a record high of $US212.76 a tonne and London Metal Exchange copper price rose 3.2 per cent to a record high of $US10.420 a tonne as the prospect of sustained US policy stimulus fuelled expectations of a commodity supercycle.

Takeover interest caused both Crown Resorts and Star Entertainment to surge more than 7 per cent after the latter trumped an upwardly revised takeover bid for Crown from Blackstone Group.

Banks mostly rose with three of the major banks including Commonwealth Bank, National Australia Bank and Westpac up at least 1.2 per cent although ANZ fell 1.3 per cent ex-dividend.

Underpinning the domestic economic outlook, NAB’s Monthly Business Survey saw record highs in for many of its key indicators in April despite the end of the Jobkeeper wage subsidy in March.

Business conditions leapt to a record high of 32 points in April from 24 points in March, with key components including Trading, Profitability and Employment all reaching fresh highs.

Business confidence also hit a record high of 26 points in April from 17 points in March and implies that conditions will remain strong in the near term, according to NAB.

On the eve of the federal budget, Mr Oster said that strong forward orders and record-high capacity utilisation suggest ongoing growth in business investment and hiring despite the end of JobKeeper.

Price pressures appeared to be building with survey measures trending higher, but for now official measures and the inflation outlook remain soft, according to NAB.

Despite recent talk of a sell-off this month as banks traded ex-dividend and the market entered a seasonally-weak period, VanEck’s Mr Chesler said the local bourse should soon blast through the all-time high it reached before the COVID-19 pandemic rocked global markets in 2020.

“The ASX/S&P 200 is set to surpass 7,200, likely hitting 7,500 in coming weeks, and could even go to 8,000 (this year), as iron ore hits record highs, taking BHP Billiton and Rio Tinto with it, and CBA likely striking a record $100 a share,” said VanEck’s Mr Chesler.

“We are now seeing a value-led rally ripping through the Australian share market and it is only a matter of time before the market makes a move to 7,500 and we could see an outperformance of the US share market over the remainder of the year due to the greater representation of value share in Australia.” In his view the Australian share market is “far from its potential highs.”

He noted that the Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) ratio - the market price-to-earnings ratio calculated using average (inflation-adjusted) earnings of the last 10 years - is currently at 23.1 times versus its all-time peak of 33.1 times in October 2007.

The local market was also well below the S&P 500’s CAPE ratio of 38.25 times, he said.

But Bell Potter’s head of institutional sales, Richard Coppleson, warned that the Australian share market is “usually weaker from mid-May” on a historical basis.

Most banks trade ex-dividend this month and tax-loss selling can start before financial year end.

Banks are “the most crowded trade” in the market as “almost every institutional investor is very overweight,” Mr Coppleson added.

Still, with record Chinese steel production and world growth set to stay strong, iron ore supply issues in Brazil and significant African iron ore supply likely to be some years off and of lower quality than Australia’s, Mr Coppleson said he was “comfortable” with iron ore miners.

“Even if iron ore comes back to say $US120 (a tonne), the iron ore stocks are still worth what they are now,” he said.

“So the market is not pricing in iron ore staying this high for too much longer, but the longer it does, the more the iron ore miners will continue to surprise on the upside.”