Five Reasons to be Bullish Australian Equities?

The Australian share market has been stuck in a sideways range for quite a number of months. One thing I’ve learnt over the last 28-years is that the longer a market stays in a sideways consolidation, the larger the move that follows. Whilst we can never know which way that move will be, there is growing evidence that it may be to the upside. Consider the following…

1. The level of buybacks, acquisitions and delistings will outweigh newly issued equity by some $2 billion this year – the first time the market has shrunk for 8-years. In other words, money has fewer places to flow therefore generating higher demand.
2. Interest rates will be low for longer – and may even go lower. I have said for some time that Australia is running about 4-years behind the US and Europe which have both had extremely low rates for several years. Many economists are slowly coming to the realisation that the Reserve Bank needs to cut rates further to drop the Australian Dollar and stimulate broader investment spending. Indeed just recently, the Commonwealth Bank lowered its 5-year fixed mortgage rate to 4.99% – the first time ever below 5.0%. Fixed rates are influenced by RBA cash rate outlook. Also, wholesale interest rates continue to fall as global investors pursue Australian Government bonds and in doing so drive down yields. With lower yields money will flow a lot easier into risk assets, such as equities.
3. Trading volumes have been at very low levels and many brokers are holding record levels of cash. This suggests most retail investors have not yet entered the market.
4. Whilst valuations remain elevated, forward earnings forecasts are increasing, especially in the Industrials sector.
5. And lastly I’ll play the contrarian retail card – remembering that many retail investors are the last in and the last out of the market. Not only are brokers holding record levels of cash, but recent investment Expos around Australia have had extremely low attendance levels.  We must remember that some of the best periods of a share market are the last exponential years before a correction.

Now we don’t have a crystal ball and I’ve been around long enough to know that you can’t predict the future. We can’t tell you which stock is going to be the next Big Thing.

Rather, we just play the market like a hitchhiker. If it goes up, we catch a ride and go with it. If it turns we start getting ready to stand aside and protect profits. And when it goes lower we’ll sit safely in cash.

What we do may not be rocket science. It may not be sexy. But it works.