Why is the Australian stock market rising?
Why has the Australian stock market been so bullish in recent months and will it continue to rise next year?
It is a valid question and one that is constantly being asked by astute market watchers.
There are a range of different factors that contribute to the direction of the market and for the most part it reflects our confidence in business and the economy.
If confidence is high or increasing the stock market will rise, which creates momentum. How fast or slow the momentum is will be determined by economic factors; the most recent of these being the election outcome and the subsequent RBA rate cut.
In my previous reports, I communicated that the stock market was bullish prior to the election, and so the surprise election outcome increased the bullish momentum.
With the RBA interest rate cut, we know that as the cash rate drops so do returns on cash investments. Therefore, with the cash rate being below inflation, it makes sense that investors would exit cash investments in favour of stocks to achieve a higher return together with the opportunity to also receive capital gains as the assets rise.
This influx into shares has seen the market continue to rise, particularly the banks and many other stocks in the top 20. Last week’s strong move up on the All Ordinaries Index, has been eclipsed this week with the market gaining another 2%.
As for the sectors this week, Financials were up over 2%. Given that eight of the top 20 stocks are in this sector, and the top 20 makes up nearly half of the market capitalisation of the All Ordinaries index, it’s no wonder the Australian stock market as a whole is up. Information Technology and Utilities were the other big movers this week, up over 4%.
CBA and Maquarie lead the banks up around 4%, while Coles, another top 20 stock, also rose over 6%. Of the top 100 stocks, Northern Star was up around 11% and Magellan around 10%. Caltex, on the other hand, advised the market of a sharp decline in first half company profits. Consequently, it was the worst performer for the week down over 11% and nearly 50% since January 2015, and it looks like there is more downside to come.
The All Ordinaries Index has risen over 22% since the December 2018 low, and I still believe it will make a new all-time high very soon, and potentially before the end of this month. The stock market has risen around 4% this month alone, which is significant considering that June is historically one of the worst performing months of the year. Given that the RBA is indicating it may cut the interest rate again this year, and possibly on more than one occasion, you would have to think the transition from cash investments to shares will only increase and support the current rise.
Vocus Group was once again in the news moving from being a top performer last week to a bottom performer this week, as its roller coast ride continues. It was down over 23% this week after AGL Energy pulled out of takeover talks. It certainly has been a bumpy past few weeks for Vocus shareholders, as the price of this company in the last six weeks has been up as much as 26% and down as much as 40%. In my opinion, this is not a stock you want to own right now, and if anyone is interested, I recommend waiting for the dust to settle.
So what do we expect in the market
My position on the Australian stock market has not changed, despite many other experts claiming that the market is over heated and, therefore, is expected to see it fall away strongly.
Currently the market is bullish and will remain bullish in the medium term with my target being 6900 to 7400 points. In the short term, I believe the ASX 200 will rise over the next two weeks breaking through the all-time high before falling away for one to two weeks into mid to late July. The sectors I like moving forward include Energy, Financials, Materials and Healthcare. There are also many stocks in the top 50 within these sectors that looking good right now.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au