Celebrations today for local share investors as the ASX200 finally traded above its all-time pre-Global Financial Crisis, 2007 high. At the end of last year, as global stock markets tanked, the chances of this milestone being reached appeared extremely remote. However, several factors combined to make the first half of 2019 one to remember for investors.
In terms of the catalysts for the +20% rally in the ASX200 in 2019, front and centre has been a shift by central banks including our own RBA to ease monetary policy. This resulted in bond yields reaching record lows in Australia and left the ASX200 very cheap by comparison.
As I pointed out to delegates at a conference in Noosa last week, at the heart of the current rally in stock prices is a simple investment allocation decision. If investors were to shop around for term deposit rates, they might find a financial institution offering just north of 2.0% p.a. on a 12month term deposit. A return barely above the annual rate of inflation of 1.3%.
By comparison, the ASX200 historically trades on a dividend yield of around 4.1% pa. Within the ASX200 there are stocks such as NAB and Westpac currently offering a fully franked dividend yield over 6.0% p.a.
In some respects, an easy decision that become more compelling after the result of the Federal election which preserved franking credits and negative gearing of property. The later also went some way to ease fears of a property market crash in Australia.
Also coming to the support of the ASX200, a strong run-up in the price of one of Australia's key commodity exports, iron ore. Earlier this month iron ore reached a five year high above U.S. $125 per tonne boosted by strong demand from China as well as supply constraints. Stocks such as BHP and Rio Tinto have been big beneficiaries of this dynamic.
Where to from here?
After today's milestone, the ASX200 can now look towards the next upside target in the form of the long-term trend channel resistance viewed on the chart below. At the very least, I would expect to see a short-term pullback from ahead of this resistance zone to work off overbought readings.
Longer-term, the supportive fundamental backdrop of low-interest rates is likely to remain in place for some time yet, thereby keeping the dominant uptrend in place.
Source Tradingview. The figures stated are as of the 30th of July 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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