S&P/ASX bursts through 7000 points

Australian shares have surfed rising optimism over global trade to hit a fresh record high and through the 7000-point barrier.

The S&P/ASX 200 has broken through 7000 points

Australian shares have surfed rising optimism over global trade to hit a fresh record high and break a key psychological barrier at 7000 points.

The S&P/ASX 200 jumped 46.9 points, or 0.7 per cent, to close at an all-time high of 7041.8.

After first passing 6000 points in early 2007, it has been a 13-year wait to hit 7000, with an earlier march sideswiped by the global financial crisis.

The landmark was reached after the Wall Street benchmark, the S&P 500 also set a record high near 3300 points, following confirmation of a long-awaited trade deal between the US and China that stoked investors’ risk appetite amid ultra-low interest rates, and amid a flood of central bank liquidity since central banks changed course last year.

The number of S&P/ASX 200 companies hitting record highs hit double-digits as the rally broadened.

CSL on Thursday surged to $301.04, Wesfarmers hit $44.30 and Macquarie reached $143.48.

“There’s no doubt that the switch to passive investing is fuelling broad gains,” said Rhett Kessler, a senior fund manager at Pengana Capital Group.

“You’re seeing all the main components of the index pushed up, so it’s definitely weight of money.

“People are accumulating cash, term deposits are paying nothing so they are just chasing a return.”

Rhett Kessler of Pengana Capital

The share boon is boosting ­median balanced superannuation funds, which returned 13.8 per cent in 2019, the best gains in five years, according to figures released this week by research house Super­Ratings.

Contrary to popular expectations of more modest returns in 2020, the Australian sharemarket has surged 5.4 per cent in the first 11 trading days, its best year-to-date rise since 1986.

Last year it rose 18.4 per cent, generating a total return of 23.4 per cent, its best result since 2009.

“We have seen this movie before,” Pengana’s Mr Kessler said.

“You want to make sure you’re focused on capital preservation or sitting close to the door.”

Mr Kessler has bought increasing amounts of put options recently to protect against a sell-off.

“It’s a bit ironic that as economic fundamentals and earnings estimates continue to deteriorate, ­valuations continue to expand,” he said.

The S&P/ASX 200 was trading on a record high price-to-earnings ratio near 18 times based on earnings per share estimates for the coming 12 months. This is almost 20 per cent above its long-run average of about 14.5 times. It was also trading on a decade-low dividend yield near 4 per cent.

BetaShares chief economist David Bassanese said the US-China trade deal had been the “gift that keeps on giving” as markets had now rallied for several months in anticipation of a deal.

“That said, the overall global equity outlook still remains favourable given low inflation, accommodative central banks and a likely lift in global growth and corporate earnings if the two-year uncertainty around global trade really does start to dissipate,” Mr Bassanese said.

“There are already encouraging signs of stabilisation in global manufacturing and, given this is a US presidential election year, President [Donald] Trump will likely not want to risk a severe market downturn or economic slump by antagonising China again anytime soon,” Mr Bassanese added.

Still, he said Australia’s fundamentals were “far more challenging” as its economic and corporate earnings outlook appeared “relatively weak” compared to that of the US. The 12-month rolling forward earnings per share estimate has fallen almost 7 per cent since the last reporting period in August and the four-week rolling “revision ratio” — net earnings revisions — was negative.

Yet shares have surged due to a truce in the US-China trade war, expectations of a pick-up in the global economy, renewed balance sheet expansion by the European Central Bank and the US Federal Reserve, and the lack of yield in cash and bonds.

Despite decisive central bank action and signs of stabilisation in the global economy, domestic economic growth in the September quarter remained near its weakest since the GFC.

House prices have clearly bottomed due to rate cuts and lessening macroprudential controls, and November retail sales were surprisingly strong, but overall data has remained weak.

“There’s complete complacency around central banks,” said Matt Sherwood, head of investment strategy at Perpetual. “The market seems to think interest rates will be lower forever.”

Still, he expects low interest rates for an extended period amid weak household balance sheets.

“Central bank interest rate cuts and liquidity have put a real thrust under the market,” Mr Sherwood said. “The US-China trade deal is another tailwind, but that’s largely factored into share prices already and should have no more than a one to two-day effect.

“The sharemarket rally has also been supported by a bit of recovery in the most cyclical and interest rate-sensitive parts of the economy like housing, but we think that’s likely to detract from growth for most of this year. Stronger retail sales in November likely reflected a pull-forward from the traditional Christmas sales and we still think overall the domestic economy looks pretty flat.

“We expect a year of trend growth globally but not big growth improvement, and Australia’s growth looks to remain well below trend with few catalysts for a major leg-up.”

Mr Sherwood does not have much hope of faster fiscal stimulus from the federal government. But fiscal and monetary policy may work in unison this year to keep the party going, according to Fidelity International cross-asset specialist Anthony Doyle.

“We are still positive on the Australian equity market this year,” Mr Doyle said.

“We’re in the unusual position of having tailwinds from both monetary and fiscal policy.

“Having pretty much used up all monetary policy ammunition, governments are now being asked to step up with fiscal policy to help economies break free of this very low-growth world. This will likely come via significant infrastructure development, which should be good news as low interest rates combined with fiscal stimulus is normally a positive environment for equity returns.”

Pengana’s Mr Kessler said the momentum was working in favour of passive investment funds.

“If your job is to beat the market, how do you manage this? We see a real bifurcation between stocks where we think there’s screaming value and stocks that are ridiculously expensive.”