Before the RBA's surprise rate cut last week, many investors would have given up on the thought that the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO) could possibly reach 6,000 points by the end of the year.
After the rate cut, however, there is a growing level of confidence that we just might be heading that way.
Adding to this growing optimism is the potential for further rate cuts from the RBA supposing inflation stays low.
If the RBA does in fact cut rates again, investors could easily see the sharemarket climb even higher as more investors move from low risk assets into higher risk assets in the search of a decent return.
So what will it take for the ASX 200 to reach 6,000 points?
Quite simply, the index needs to gain around 627 points or 11.7% from yesterday's close.
While that seems plausible, especially if the RBA continues to cut rates, it may be a little bit harder to achieve when you consider the following issues:
- The banks will have to do most of the heavy lifting – The big four banks make up more than 27% of the weighting of the ASX 200 and most investors realise that getting to 6,000 points is reliant on a significant rally in their share prices. You only need to consider that Commonwealth Bank of Australia (ASX: CBA) shares were trading above $96 a share when the ASX 200 was flirting with the 6,000 point mark in April 2015. Australia and New Zealand Banking Group (ASX: ANZ) was also trading at more than $36 per share which means its shares would have to gain nearly 50% from here to reach those same levels.
- The banks are facing a number of headwinds – Connected with the point above, it is hard to see bank shares rising to the same levels they reached in 2015 as investors are more aware of the challenges facing them. While the banks offer great dividends (and will become even more attractive if the RBA cuts rates again), investors are also looking for growth and capital stability – something lacking from the major banks at the moment.
- The supermarket sector is fiercely competitive – Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) combine to make up around 5.4% of the index weight which means they will also need to perform strongly to help get the ASX 200 to 6,000 points. This is difficult to picture at the moment considering they are both locked into a deflationary and competitive environment which is crimping profits – especially for Woolworths. Shares of Woolworths were trading at more than $33 per share in April 2015 – down by more than 31% since then and still facing a long uphill battle to regain investor confidence.
- Materials and energy sectors are still facing headwinds – While not having as big of an impact as they previously had, these sectors still combine to make up around 17% of the overall index. The challenges facing these sectors are well known and the short-term outlook for companies like BHP Billiton Limited (ASX: BHP) and Woodside Petroleum Limited (ASX: WPL) still remains depressed. Investors should consider that for BHP to reach its 52-week high of $32.80, its shares would have to rise an almighty 77% from here!
- Many mid-cap and growth shares appear fully valued – A large number of smaller companies in the index have enjoyed tremendous share price gains over the past year which means contributions from these stocks may be limited. In particular, companies in the healthcare, property and infrastructure sectors have performed extremely well thanks to strong support from investors looking for growth and/or a reliable income stream.
Foolish takeaway
When you consider that the companies and sectors listed in the first four points make up nearly 50% of the total index weight, it doesn't take much to realise that getting to 6,000 points by the year's end might be harder than first thought.
At the end of the day, however, investors need to remember that the market is made up of more than 2,000 companies and its more important to buy high quality businesses at good prices than to focus on a single number!
