July Economy and Indices summary

Economy and Indices

The ASX (Top 200) shares are near their all-time highs – levels not seen since before the GFC some 11 to 12 years ago.

The driving forces then were strong Chinese growth rates, roaring commodities prices with the upwards trajectory set by the low interest rates in the US in the aftermath of the market crash or 2000, the ‘Tech Wreck’, and the US war efforts post September 11. Those years of low-interest rates lead to the prosperous markets that we know ended in the GFC.

Today the markets are still fuelled, by now even lower, interest rates and investor’s competition for growth and returns at any cost. This pursuit of growth and returns has seen the prices of investments with strong dividend yields or growth prospects chased up to very high prices. This is what analysts call ‘PE expansion’ – where the price of shares goes up beyond levels that can be justified by the company’s earnings (or profit) growth.

The markets’ expectations of interest rate movements have now brought forward another interest rate cut from the Reserve Bank of Australia (RBA). What was previously expected to be September has now moved earlier to a drop in August this year. Plus another interest rate cut down to 0.75% by Christmas.

These unprecedented low interest rates potentially push the PE expansion further – which is the main driving of pushing share prices higher still. Albeit at unjustifiable levels on most valuations basis.

Hear more on this topic in this podcast with Rudi from FNArena.

Podcasts:

We regularly interview industry exports on numerous topics available in the Podcast playlist here.