The S&P/ASX 200 (INDEXASX: XJO) has rocketed to just 50 points shy of 7,000 while the ALL ORDINARIES (INDEXASX: XAO) is already eyeing 7,100. As the Australian share market is soaring into record territory, could this be a top or is it our time to play catch up against US indices?
Record low interest rates propping prices
A sustained low interest rate environment will be the theme that continues to buoy equity markets. The Australian cash rate currently sits at just 0.75% and there is an increasing likelihood that the Reserve Bank of Australia (RBA) will make another cut this year.
The devastating bushfire crisis could be a drag on GDP growth in the short term, while other factors such as low inflation, weak consumer spending and the possibility of lower employment could tip interest rates another 0.25 bps lower. The lower the interest rate/discount rate, the more ‘inflated’ a share price can become.
Banks under pressure
The ASX 200 is heavily weighted towards financials, namely the big 4 banks. In order for the index to move higher, it needs the support of the heavyweights.
Australian banks are typically resilient during business trough periods. This is driven by their sustained cash earnings and ‘unquestionably strong’ capital positions. However, Morgan Stanley has painted a gloomy picture for the year ahead with lower interest rates, tighter lending standards and heightened regulatory standards putting earnings at risk. If the big 4 banks cannot make share price strides in 2020, it will make it increasingly difficult for the ASX 200 to push higher.
Growth sectors trending strongly
Sectors such as healthcare, information technology and consumer staples are leading the charge. Industry tailwinds and bullish sentiment continue to push prices higher.
The Australian healthcare sector continues to be a standout performer with many leading names such as CSL Limited (ASX: CSL), Cochlear Limited (ASX: COH) and Sonic Healthcare Limited (ASX: SHL) all hitting record highs while delivering solid underlying growth.
Australian information technology shares are enjoying industry tailwinds as large players such as Afterpay Ltd (ASX: APT) shake off regulatory concerns, Altium Limited (ASX: ALU) goes full steam ahead in its goal for sector dominance and Xero Limited (ASX: XRO) continues to trend higher off its upbeat FY19 results. Australian fintech is also rising to the occasion from large caps such as EML Payments Ltd (ASX: EML) to newly listed players such as Tyro Payments Ltd (ASX: TYR) and MoneyMe Ltd (ASX: MME).
Iron ore in 2020
Mining contributes approximately 10% of the Australian economy. A stabilising iron ore spot price and China’s continued investment into infrastructure and construction should continue to buoy iron ore prices in the short-term. Headwinds such as an increase in production from the world’s largest iron ore miner, Vale SA, could create headwinds for the industry towards late 2020 and beyond.
The market is looking increasingly bullish and lower interest rates should continue to support higher equity market prices. Australian banks face earnings headwinds, but the question is whether or not the market has already priced-in weaker earnings. Growth sectors across the board from technology to healthcare are looking strong. Bond proxies such as Transurban Group (ASX: TCL) and REITs could further benefit from lower interest rates. While the market could cool off in the coming days given its recent run, my gut feeling is that we’ve still got some gas in the tank.
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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, Cochlear Ltd., CSL Ltd., and Emerchants Limited. The Motley Fool Australia owns shares of Altium and Xero. The Motley Fool Australia has recommended Cochlear Ltd., Emerchants Limited, and Sonic Healthcare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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