Market near five-year high as investors chase yields

Sitting at a near five-year high, the Australian sharemarket has enjoyed a stellar run so far this year.

The good run of form is not limited to Australia, with markets on Wall Street and in Europe picking up off the lows of the global financial crisis and hitting record highs.

Central banks across the globe are pumping new money into the financial system through quantitative easing, and the cash has to go somewhere.

With record low interest rates, locally and internationally, equity yields have looked attractive.

In fact, the rush into shares has been so drastic that US Federal Reserve chairman Ben Bernanke has taken notice. "In light of the current low interest-rate environment, we are watching particularly closely for instances of 'reaching for yield' and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals," he told a Chicago Fed conference.

Locally, the search for yield has led to a 12 per cent rise on the benchmark S&P/ASX200 this year.

High-yield bank stocks have been the main driver behind the gains which began last year. This year the financial sector has surged 21.1 per cent, with the Commonwealth Bank and Westpac joining BHP Billiton as the only companies on the ASX with market caps above $100 billion.

However, chief investment officer at Platypus Asset Management Donald Williams said that while yield is still important, the outperformance of the financial sector had likely run its course and the market would start to focus on companies that have earnings growth.

He expected the ASX200 to rise a couple more hundred points this year, with retail showing signs of improvement. "It's a long way from boom times, but a lot of retailers are now reporting same-store sales growth."

Mr Williams shied away from the mining sector, which is down 8 per cent this year, despite share price improvements in recent weeks: "The reduction in commodity prices is a bigger negative than volume growth is a positive."