It’s among the top stock markets in the world this year and inching closer to an all-time high. Australia’s benchmark S&P/ASX 200 Index has surged 19% this year, adding about $216bn in value despite a sluggish economy and a housing slump. Investor concerns eased after a federal election and the Royal Commission’s inquiry into the financial sector stopped short of demanding a structural overhaul in the sector.
Still, analysts have been divided on where Aussie stocks will go after this year’s rally with Citigroup Inc and Morgan Stanley Wealth Management cheering the surge, and Goldman Sachs Group Inc taking the other side of the trade and downgrading the market to underweight.
Here are some details marking the gauge’s path to its best year in a decade:
RBA boost: After hitting an all-time high in 2007, the S&P/ASX 200 Index is about 2% away from a fresh record. Investors’ expectation for further monetary policy easing has driven equities higher, and with yields falling that might extend the demand for stocks, Citi analysts wrote in a note last month.
The Reserve Bank of Australia came out with back-to-back interest rate reductions in June and July – and the market is pricing in another cut within the next six months. Iron ore prices and record-low bond yields have also boosted the index.
Communication is key: Communication services stocks gained 31% this year to become Australia’s best-performing sector, while tech stocks took the No 2 spot. The miner-heavy materials sub-gauge came in third, up 24% on the back of this year’s iron-ore rally.
Nine Entertainment Co Holdings Ltd led gains among media companies and telcos, in part thanks to its growing subscription TV service.
Telstra Corp Ltd also advanced after the nation’s regulator blocked a $7.7bn merger of Vodafone Group Plc’s struggling Australian business with TPG Telecom Ltd.
Australia’s burgeoning tech sector, with its own five letter acronym WAAAX, surged this year as investors sought exposure to the global rally that has sent US tech equities soaring since 2017.
Good and bad banks: The completion of the Royal Commission inquiry earlier this year buoyed shares of financial firms. Australia’s big-four banks, which make up about a quarter of the index, contributed to the market surge.
But now, Credit Suisse sees the bank rally fading after the RBA dropped the cash rate to a record low of 1%. Earnings forecasts for Australian banks were lowered by as much as 5% after the latest rate decision because of the likely impact on margins, analysts wrote in a note dated July 8.
Earnings yearning: Will the rally keep going? The next catalyst will be the upcoming earnings season in August. The profit outlook for 2020 has improved, and equities may continue to see support from a more certain political landscape and further rate cuts, Morgans analysts wrote in a July 3 note.
But prepare for a volatile ride – at least for emerging companies – their share price moves may be more than 10% depending on results, according to a July 8 note from Morgan Stanley.
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