Bullish Australian, US sharemarkets could be heading for a big correction

The ASX is not far off its all-time high. So was Warren Buffett right in warning ‘be fearful when others are greedy, and greedy when others are fearful’?

So-called ‘mum and dad’ investors keep piling into sharemarkets, with nowhere else to go for decent returns as COVID-19 continues sweeping across the globe.

But the astonishing rise in share prices and key indices that has resulted begs the question, has it gone too far?

Wall Street keeps setting fresh records, with the Nasdaq tech index leading the charge in the US, while the Australian sharemarket is back to levels last seen in late February, before the pandemic sparked widespread shutdowns.

Closing at 6825 on Monday, the benchmark S&P/ASX 200 index is not far off the all-time high of 7162.5 reached on February 20 last year.

The remarkable bounce has certainly surprised market observers, among them Axi chief global market strategist Stephen Innes.

The Bangkok-based financial markets veteran says the continued buying by non-institutional shareholders, known as retail investors, has been “phenomenal”.

The Nasdaq tech index has been leading the US rally: Picture: Michael Nagle/Bloomberg

“They are constantly chasing for yield - they don’t have an option,” Mr Innes told NCA NewsWire on Tuesday.

“They don’t have enough money to buy property, they don’t have enough money to buy high-end art, they don’t have enough money to buy Bitcoin but they have enough money to buy little stocks and that’s why we’re seeing these frothy conditions.”

And with interest rates at record lows, stashing money in the bank is clearly not going to earn much.

Airlie Funds Management portfolio manager Emma Fisher noted in an opinion piece published on the ASX last month that Australian shares were historically expensive but the market’s dividend yield was 3.3 per cent versus the cash rate of 0.1 per cent.

“You’ve never been paid more for putting your money in the sharemarket versus a bank deposit,” Ms Fisher wrote.

So is it too late to buy stocks?

Mr Innes said it appeared there was still some steam left but the road ahead would be bumpy and there was risk of a correction.

“I do feel we’re reaching an inflection point but not because the market is high, but because the market needs proof in the pudding,” he said.

“In other words, they need the economic data to start supporting the underlying narrative.”

That will become glaringly apparent when policy responses to the pandemic dry up.

Mr Innes said he believed the US was “pretty much at the end of the runway” with economic stimulus measures while the great unknown was the all-important rollout of COVID-19 vaccines around the globe.

It was not going to be smooth as hoped and in fact, was looking “completely disorganised”, which was a worrying sign.

“It’s precarious - it’s not going to take much to knock it (sharemarket bullishness) off its axis,” he said.

Share price, bull, bear, shares, stocks. Hands raised into the air and electronic stock market board.

Mr Innes said it made sense there had been a global rally in stay-at-home tech stocks such as Netflix and while China still needed Australian commodities, the new age economy was “coming through”.

“The story is too big to miss ... everybody is using technology and technology is going to be advancing a lot quicker than it has been in the period since the dotcom bubble,” Mr Innes said.

“The shift is moving away from supply chain dominance.

“We have to be careful, we have to be probably more selective ... look at stocks that are sort of off-the-beaten track but are still industry-related to tech.

“We’re seeing in the markets right now little weird names coming out of the blue and surprising everybody and that’s the way, I think, the investment community is morphing right now.”

A case in point in Australia is the stellar emergence of the growing buy-now-pay-later sector.

Shares in market leader Afterpay were priced at about $37 a year ago and closed at $143.46 on Monday, but some savvy investors picked them up for less than $9 in March when the health crisis intensified.

That example certainly evokes investment guru Warren Buffett’s famous advice: “Be fearful when others are greedy, and greedy when others are fearful.”

Ms Fisher agrees 2021 is the year to be selective, with company valuations and general uncertainty elevated.

Originally published as Bullish Australian, US sharemarkets could be heading for a big correction