Market near five-year high as investors chase yields
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."
Frequently Asked Questions about this Article…
The article says the market’s rise is driven by a global recovery in equities, record low interest rates and central bank quantitative easing that has pumped cash into financial systems. That extra liquidity and low bond yields have pushed investors into shares, helping the ASX approach five-year highs.
According to the article, quantitative easing and very low interest rates mean cash is abundant and traditional safe returns are limited. Investors chase higher yields in equities, which can lift share prices and drive sectors with strong dividends or yield expectations higher.
The piece notes high-yield bank stocks led the gains, with the financial sector up 21.1% this year. Low interest rates and the search for yield have made bank shares attractive to investors, boosting the sector’s contribution to the market rally.
The article mentions that Commonwealth Bank, Westpac and BHP Billiton are the only companies on the ASX with market caps above $100 billion.
The article quotes US Fed chair Ben Bernanke warning that in a low-rate environment regulators are watching for 'reaching for yield' and excessive risk-taking because it can affect asset prices and their links to fundamentals. That suggests investors should be mindful that higher yields can come with higher risk.
Donald Williams said while yield remains important, the financial sector’s outperformance has likely run its course and the market will start focusing more on companies with earnings growth. He expects the ASX200 to rise a couple more hundred points this year and noted retail is showing signs of improvement.
The article reports the mining sector is down about 8% this year despite some recent share price improvements. Williams said the reduction in commodity prices is a bigger negative than any positive from volume growth, highlighting commodity price risk for miners.
The article says retail is showing signs of improvement, with many retailers now reporting same-store sales growth. That trend is one reason quoted for expecting further gains in the ASX200.
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