As market soars, here are five economic potholes to avoid
Australia’s share market finished the year not with a whimper, but a bang.
The benchmark ASX200 index finished the year just shy of 6,000 points, generating an impressive 16.2% in the June quarter.
For the full financial year, the index fell by 11.3%, a respectable return given March’s market turmoil.
Already, just a few days into the new financial year, the upwards trend is continuing, and shows no signs of slowing down.
Driving that seemingly unstoppable rise in share prices is billions of dollars in stimulus money, with investors – many of them testing the market for the first time – fearful of missing out.
Also fuelling the momentum is a sharp rise in the popularity of ETFs, which many newer investors are viewing as a safer alternative to individual stocks.
Given the ultra-low outlook for interest rates, it’s easy to argue the market is pricing equities purely on the basis of a comparison to the returns available from other asset classes, rather than on an assessment of risk vs return.
That’s a dangerous scenario should the basis of those comparisons change, for example, a rise in interest rates.
Remember that no investor alive has even witnessed interest rates this low, nor the scale of stimulus spending. So, we’re in uncharted territory, and Morgans is cautious of potential potholes in coming months.
We see five key risks, any one of which could potentially derail the current resurgence in share prices:
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- In the next few weeks, companies start releasing their full-year results, and the true impact of COVID-19 on corporate Australia will be revealed. If those results are worse than the share prices imply, then expect a negative response from the market.
- Compared to other developed nations, Australia has so far managed to successfully contain the COVID-19 outbreak. A second wave of infection, or failure to manage the pandemic, could see a reset of investor expectations.
- Much of the government stimulus which has, so far, sheltered the economy from the worst impacts of the downturn are scheduled to wind up at the end of September. The sudden withdrawal of stimulus, in the absence of a corresponding rebound in economy activity and employment, could see an exodus of investors from the market.
- Global trade relations have been on uneasy ground for some time. Markets like stability, and any further deterioration in relations between the West, and China in particular, would be damaging.
- The United States presidential election campaign is starting to gather momentum, and although we won’t know who will spend the next four years in the oval office until November, that still represents another four months of uncertainty. When combined with the growing concerns about the US response to COVID-19, the very real risks of a correction to US share markets will remain. And of course Australia, isn’t immune from the impact of falling markets in the world’s largest economy.
While the risks to financial markets in coming months are real, there will still be investment opportunities in our rapidly changing markets. Get in touch with your local Morgans office to find out how you can take advantage of those opportunities.
Disclaimer: The information contained in this article is provided to you by Morgans Financial Limited as general advice only and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.
