Bourse on a roll amid hopes of rapid reopening

Australia’s sharemarket continues to surge amid ongoing central bank stimulus and expectations that Covid vaccinations will allow a rapid reopening of the global economy.

Rising US and European markets and mostly positive results from corporate Australia saw the local bourse hit a record high this week despite the negatives.

Australia’s sharemarket continues to surge amid ongoing central bank stimulus and expectations that Covid vaccinations will allow a rapid reopening of the global economy.

Rising US and European markets and mostly positive results from corporate Australia saw the local bourse hit a record high this week despite stretched valuations, a bear market in iron ore prices, a worsening short-term economic outlook and the risk of longer-term damage from lockdowns as business confidence plunged to its second-lowest point since the global financial crisis.

Despite growing expectations of a pullback in shares, the S&P/ASX 200 rose 1.2 per cent to a record high daily close of 7628.9 points following a 1.4 per cent rise in the S&P 500 on Wall Street since last Thursday.

After exceeding its June peak near 7400 in late July, the index has risen in 10 of the past 12 days.

A 0.5 per cent rise on Friday was its biggest one-day gain in almost two weeks.

While the local bourse has basically tracked Wall Street after the US Senate approved a $US1 trillion ($1.36 trillion) infrastructure plan this week, the August reporting season has seen 71 per cent of reporting companies either meet or exceed expectations for profit, according to AMP Capital.

Encouragingly, 79 per cent of reporting companies have increased their June half-year profit compared to 2020, and 71 per cent have increased their dividends.

“While the lockdowns are weighing on the outlook so far this seems to have been swamped by reports of strong earnings growth and a huge return of capital to shareholders via dividends and buybacks notably by Rio Tinto, CBA and Telstra,” said AMP Capital’s head of investment strategy and chief economist, Shane Oliver.

But only about 35 major companies have reported so far and there is a tendency for good news results to come out early in the reporting period, Dr Oliver noted.

“Shares remain vulnerable to a short-term correction with possible triggers being the upswing in global coronavirus cases, the inflation scare and US taper talk, likely US tax hikes and a debt ceiling standoff and geopolitical risks,” he said.

He estimated the lockdowns since late May will cost $17bn – with NSW at around $9bn assuming it ends at the end of this month, albeit that’s unlikely, and Victoria’s three lockdowns at nearly $5bn.

“Last week we revised down our September quarter GDP growth forecast to minus 2.5 per cent quarter on quarter, and growth through this year down to 2.5 per cent year on year, but this is already looking optimistic,” Dr Oliver said.

“However, we remain of the view that growth is likely to start recovering through the December quarter as lockdowns ultimately suppress cases but more sustainably as rapidly rising vaccination rates allow a transition away from using lockdowns and as pent up demand supported by government pandemic support payments is unleashed.”

CBA fell almost 5 per cent from a record high of $109.03 as Citi and Credit Suisse both downgraded their ratings on valuation concerns despite a bigger-than-expected June half year profit, dividend and share buyback announcement.

But investors happily switched into cheaper banks like NAB and Westpac, as well as CSL, which was due to report its full-year results next Wednesday

NAB and Westpac both rose about 4 per cent for the week, while CBA was little changed.

CSL was flat for the week but up 2.4 per cent on Friday.

Insurers were standouts, with strong share price gains following better than expected results.

QBE Insurance surged 12 per cent and IAG gained 8.8 per cent amid their earnings reports this week, while Suncorp was still up 4.3 per cent even after trading ex-dividend on Friday.

Similarly, Rio Tinto fell 6.9 per cent ex-dividend, to be down 7.5 per cent for the week, as iron ore futures fell 5 per cent to a 4 month low of $US159.10 a tonne amid China’s crackdown on pollution from steel making, to be down 26 per cent in four weeks.

But while Fortescue fell 3.3 per cent this week after losing 7.5 per cent last week, BHP managed to rise 1.4 per cent for the week.

BHP is expected to announce a $1.85 a share half-year dividend and a bumper profit of almost $12bn when it reports next week.

Fortescue should also report a big profit and dividend when it reports at the end of the month.

But iron ore miners are expected to be vulnerable to steep falls when they trade ex-dividend.

“Looking through the short-term noise, the combination of improving global growth and earnings helped by more fiscal stimulus, vaccines allowing reopening once herd immunity is reached and still low interest rates augurs well for shares over the next 12 months,” said Dr Oliver.

Originally published as Bourse on a roll amid hopes of rapid reopening