After another impressive week the Australian share market is pushing the 6,000 mark again. The benchmark S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index closed last week at 5,975 while the All Ordinaries finished at 5,936. Will it rally above 6,000 in the near future?
With interest rates tipped to fall further in 2015, it is likely investors with cash sitting in bank accounts and term deposits will decide that a measly 2-3% p.a. return is not good enough and will seek higher yields in the stock market.
Another large influx of cash may come from the superannuation industry. According to ASFA's February 2015 report, SMSFs now hold over $550 billion of assets, or nearly 30% of total superannuation assets. Cash and term deposits account for 28% of this and are reported at $155 billion. Importantly, Australian shares account for 33% of all SMSF assets, indicating a high proportion of any future cash flows will hit the ASX.
In addition, mandated contributions to superannuation funds in 2015 will result in an additional $35 billion flowing into Australian shares, assuming current portfolio ratios are maintained. This is enough cash to raise the ASX 200 index by around 2% at current levels.
Yield-chasing investors have pushed many ASX-listed stocks, including Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS), to sky high valuations. As can be seen below, the current price-earnings (P/E) ratio of these two companies is well above previous 5-year averages.
Whilst the current low interest rate environment may continue to support the elevated valuations of these companies, investors buying at these prices are unlikely to achieve market-beating long term returns.
Investors wanting to achieve long term growth in capital and dividends, however, should look for stocks trading at more attractive prices relative to their future prospects, including:
Woolworths Limited (ASX: WOW) has fallen out of favour with the market amid competition concerns and the struggling Masters home improvement business. Investors haven't had a better, or cheaper, opportunity to pick up Woolies shares in over two years. The longer term prospects of the business are attractive and the stable 4.7% dividend yield will reward long-term investors.
G8 Education Ltd (ASX: GEM) recently announced excellent full year results to be sold down heavily by the market and is trading near its 52-week low. Giving investors a 6.6% fully franked dividend yield and the potential for capital growth, G8 is a good buy at current prices.
Although making future predictions for the markets is usually a fool's (lower case f) game, the current low interest rate environment makes it likely that the ASX will continue marching upward and onward through the 6,000 mark. Those with substantial amounts of cash sitting on the sidelines may miss out on further gains in the equity markets.
