Aussie Shares Hit 10yr High – Behind the Scenes

The front page of the AFR today carries the headline ‘Sharemarket hits a 10-year high’ as the ASX200 sits at 6172.  Over in the US, the Dow Jones is still in the red for the year but the S&P500 rose last night to be up 3.5% for the year largely off Tech Stocks.

Whilst the Aussie sharemarket price action is certainly good news there was no mentioned of the fact that it is still below the pre GFC high of 6749 (before it more than halved to 3145).  So 10 years on and those that were ‘all in’ pre GCF have not yet gotten back to square.  Another lesson in balance given gold doubled during that same GFC period.

The gains yesterday gave a little insight too into underlying drivers, or perhaps ‘driver’ in the singular… interest rates.  The AFR article notably mentioned:

“…a mounting view that the Reserve Bank's first interest rate hike pencilled in by forecasters for the first-half of 2019 is at risk of being pushed out even later.”

"The clear consensus through the year has been for rising rates and the reality is that the upward momentum in rates hasn't continued. It seems the economy, particularly in Australia, hasn't the strength to handle higher rates,"

"What's been interesting is that a lot of people have been cautious on the market, saying we're late cycle or valuations are toppy, but the market has nevertheless gone on with it,"

So to be clear… the sharemarket appears to be rallying because the cheap debt game continues rather than strong fundamentals…

Yesterday’s gains were largely off financials who can buy that cheap debt and sell it to you for profit, further exacerbating Australia’s world leading 190% personal debt to GDP ‘issue’.

The other driver yesterday was the AUD hitting year lows in the 73’s..

“The gains have also been supported by a fall in the Australian dollar to June 2017 levels, boosting offshore earners..”

That’s a double edge sword as it also erodes our purchasing power overseas but our sharemarket is dominated by exporters, so all is good.

That falling AUD has certainly boosted prices for gold and silver holders despite the USD spot price languishing in recent weeks.  Year to date gold and silver are down 3% and 4% in USD terms but up 3% and 2% respectively in AUD.  When comparing that to the ASX200 being up 1.8% this year, you have still been better off in the metals than shares.  This at a time too, depending on where you live, that your property prices may have declined or drifted sideways at best.  We are certainly at an interesting juncture in all markets but any 40,000 feet view would suggest shares and property are looking (and to use the AFR quote) ‘toppy’ whilst gold and silver are clearly in the very early stages of the bull market that started in November 2015.

Where the AUD goes from here is anyone’s guess but the pressure appears to be down and all eyes will continue to be on the big global central banks.  The AUD has been strong for a few years as we were paying a relatively ‘high’ yield of 1.5% for holding the Aussie when the Fed were near zero and the ECB and Japan were actually negative.  We now have the Fed at 2% and so all of a sudden we aren’t the yielding safe haven we once were.  Whilst the narrative focusses on the local rate being ‘only’ 1.5% with no signs of that increasing anytime soon, our banks still have around $1 trillion of overseas sourced debt that is seeing rising costs as interest rates start to climb.  Suffice to say they will quickly pass that on regardless of what the RBA does.  Higher rates, record high debt and falling property prices is a toxic mix for ‘the lucky country’.