The Australian sharemarket almost breached the 6000 point mark this week for the first time since 2008.
Traders got nervous and booked profits rather than bid it higher to those pre-global financial crisis levels.
It might be just a number but it is an important psychological one for investors who wore the pain of the GFC.
WILL IT GET THERE IN THE SHORT-TERM?
The answer seems to be yes, according to the experts.
A catalyst would be a Reserve Bank interest rate cut next week to follow last month’s.
Financial institutions lined up this week to raise their forecasts.
Credit Suisse investment strategist David McDonald raised the group’s 12-month ASX200 target to 6,400.
Citi’s head strategist Tony Brennan upgraded his forecast for the end of the year to 6,300 while Deutsche Bank thinks there is a reasonable chance it will hit 6000 soon.
WHY HAS THE MARKET RALLIED SO STRONGLY?
Last month’s interest rate cut and the weaker Australian dollar are pushing investors away from cash and bonds as preferred asset classes and into equities or property.
The rally has been running for five weeks, but before that the market had been sold off heavily for 4-5 months before the ASX200 closed at a low below 5,300 on January 16.
The February earnings season has been lacklustre, worse than that for mining and energy companies, but that was expected so there were no serious nasty surprises, says Mr McDonald.
Optimism about the global economy, specifically Europe, China and the US is currently positive.
IG markets strategist Evan Lucas says that interest rates have fallen so low, that people who invest in cash such as 90-day term deposit rates with 2.25 per cent are actually getting negative returns once inflation and taxes are factored in.
“We are also getting support from the heavily oversold mining space and anything offering you a reasonable dividend yield,” he said.
“I can’t believe BHP Billiton is a dividend play at five per cent … it historically pays you two per cent.”
SHOULD SHARE PRICES BE THIS HIGH BASED ON HOW WELL THE ECONOMY AND COMPANIES ARE PERFORMING?
No, says Mr Lucas, company bottom lines in terms of revenue and earnings this month have been lax and don’t justify the share price rise.
So it wouldn’t take much, such as a global financial hiccup to upset the momentum and stop the market reaching 6,000.
Price earnings multiples – a ratio of a company’s current share price compared to its per-share earnings – are at their highest level since 2008.
That means there is a risk stocks are too expensive, although they are not at record highs.
But that doesn’t mean the ASX200 and All Ordinaries indexes won’t go well beyond 6,000 points.
If people are making negative returns parking their money in a bank deposit, logically the money will be parked somewhere else, possibly in the bank’s shares instead, says Mr Lucas.
Investors will chase dividend yields to get income to replace what they used to get from cash and bonds, proven by the strong rises in Telstra and CSL .
As Mr Lucas, says, “don’t fight the momentum mate”.
