Why we should be sceptical about the ASX’s new record highs

The sharemarket has hit an all-time high. Australian share investors should saddle up for a golden period of sharemarket returns. It’s a green light for future returns Or is it?

Take the record on the ASX with caution. Here’s why.

It’s not much of a record

Any seasoned investor with an eye on global markets will treat this week’s local sharemarket ‘record’ with caution. Our market has taken a very long time to enter what traders call ‘blue sky’. What’s more, there is little happening in the domestic economy to justify any further acceleration of market returns.

In fact, we surpassed the previous record of 7632.80 on Wednesday long after many overseas markets bounded ahead.

Worse still, if you look a long way back the record is even less impressive. In aggregate, the Australian sharemarket has been going nowhere for more than a decade — back in early 2020 we were comfortably above 7,000 points. In other words, it’s a very modest achievement.

Of course, there is always money to be made from individual stocks at any level, from large caps to small caps. But, for the growing number of investors who depend on index-based Exchange Traded Funds, the hard truth is the ASX has been limping along.

The heart of the problem is a lack of risk-taking by our major companies. The ‘big four’ banks capture the problem perfectly, with most of them — except CBA — trading only marginally higher than they were a few years ago. In turn, this drags down returns for the broader market because they dominate the exchange so heavily.

Can it hold onto recent gains?

The records were hit during Wednesday’s session thanks to a better-than-expected inflation number before being bested again Friday when we closed at a new record of 7699.4.

If the market is to move significantly upwards from here we have to assume it will be largely to improved sentiment about the long-term outlook of how lower inflation and ultimately lower rates might lift local share prices.
Certainly there are strong factors in the local economy weighing against a bull run. Retail sales numbers this week showed the weakest annual rate for three years. The signs are strong this will be the year accumulated mortgage stress hits home thanks to higher interest rates. Share prices are based on price and earnings ratios — the earnings are going to be lukewarm this season — so it will have to be the ‘price’ side of the equation which moves the dial.

In other words, investors will need to be willing to pay more for local shares than in the past.

Markets across the world offer much better returns

Looking at the returns for last year it literally hurts. The world (MSCI) index did 18 per cent, and on mainstream Wall Street the S&P 500 index did a total return of 26 per cent and the NASDAQ did 37 per cent. The ASX did 12 per cent.

We are seeing repeated stretches where the US market in particular beats the ASX out the door, and though there are times when the ASX — with its legion of “value stocks” — is supposed to outperform the high-growth US market, it rarely happens.

On top of that, the enduring argument saying we lack both a serious tech sector and a serious pharmaceutical sector means investors have to go offshore to pick up quality stocks in those industries.

Not long ago, it was a big deal to buy overseas stocks. Now, it is relatively easily and can be done online with any broker.

It is clear a younger generation of investors are bypassing the ASX altogether. Their first shares are now in Tesla or Amazon. With continued ‘outperformance’ they may never engage with the local market.

The ASX is not keeping up

As a regional market vying against the titans of the world stage the ASX is facing some serious headwinds. Put simply, it is being hit on two sides — less money coming in and more money going out.

Over the past year the IPO market — the market for new listings — went to sleep.

We just did not see the big listings or privatisations of the past, and the market was left to look at a handful of very small IPOs.

Worse still, the few larger IPOs which did occur did not do particularly well. Redox, the most significant IPO of the year listed at $2.55 in July last year and is today trading near $2.28.

No wonder investors are cautious about IPOs. Even the biggest deal of the year — the Chemist Warehouse float through a back door listing with the Sigma Group — wasn’t a fully-fledged IPO, which might have given the market a boost.

On the other side, the problem is perhaps more disturbing. We are seeing ‘de-equitisation,’ the removal of key companies, which empties the market of major players.

Last year the big departure was the nation’s largest goldminer Newcrest, swallowed up by long time revival Newmont. Before that Sydney Airport — another favourite of local investors — was snapped up by Big Super.

Takeovers are a perfectly natural dimension of market activity but they need to be balanced by action on the other side of the ledger. Right now this is not happening. Instead, potential leaders of the local market such as software group Atlassian — with a $US65bn market capitalisation — ignore the ASX and list on Wall Street.

Bulls are rare to spot

If we look at the most pessimistic brokers, they are saying the ASX will do very little in the year ahead — most suggest total returns will be around 9 per cent. Some suggest flat earnings will mean it will be very difficult to push the index higher.

UBS, for example, has a target for December 2024 of 7660 points — which is basically where we are just now.

Of course the key issue with our market is a hefty dividend yield close to 4.5 per cent, and there are those who believe our market could surprise on the upside assuming the dividend yield holds at that level and prices jump higher than consensus forecasts.

Though the real economy is only expected to limp along with GDP growth of 1 per cent, the bulls suggest markets will be looking to better times in 2025, and baking those assumptions into share prices later this year.

David Bassanese, chief economist at Betashares, puts a bullish case forward saying investors will be emboldened by this improved long term outlook in the months ahead.

As he writes, “There’s a good chance of notable earnings upgrades as and when the RBA cuts interest rates and the economic outlook starts to improve. As a result, we could see the S&P/ASX 200 at 8000 (points) before Christmas, if not higher”.

ASX ltd — the stock price tells us a lot

The local exchange is listed on the local exchange. The fortunes of ASX ltd shine a light on the wider malaise in the market.

In many ways this should be a knockout stock. It has an iron-like grip on the bulk of local trading activity. Indeed, the excitement around the creation of a national exchange and then the listing of said exchange stoked enormous interest and high hopes for the ASX for many years.

As it stands today, the ASX company is best known for its dreadful IT tangles and a reduced role as a player on the national stage.

The share price of the ASX is actually lower now than it was five years ago. In early 2019 it was worth $69, and today it is worth $64.

The market never lies, and the ASX share price trajectory tells its own story.

Wealth Editor James Kirby hosts the twice weekly Money Puzzle podcast