Markets: Views from the peaks

Five long and tumultuous years on, the ASX 200 is reaching new lofty highs.

Finally sitting comfortably above 5,000 points once again, the index's closing measure of 5,234 points has not been seen since June 2008, when the market was making its descent to catastrophic lows.

Local shares have gained 66 per cent since March 2009 lows. In comparison to the 16 months it took to wipe 54 per cent off the index, the climb back has been at snail pace.

Key themes and market forces that have pushed the index along, particularly over the past two years, will not be the same in the years ahead as global and domestic growth drivers change.

Taking a look at these, it is evident the love affair with Australia’s popular banks and the financial sector (orange line) as a whole has not been enough to give this sector top spot over the past two years. Number one ranking goes to healthcare (green line), followed by telecommunications (red line). The index is represented by the white line below.

China and Japan have been warmly welcomed back to the global growth story and will be central to how our domestic market fares over the months ahead.

A combination of China hitting its GDP growth target of 7.5 per cent this year, likely maintaining around 7 per cent in the years ahead, bodes well for Australia. In addition to this, Japan’s aggressive attempts to spark inflation is a bonus for global growth in general.

Also, the change in government is set to offer more support for the market as there is a firm belief the Liberal government will improve confidence over the country’s fiscal management.

Still, it is not as simple as onwards and upwards from here. There remain treacherous waters the market must sail through.  

Next week, the Federal Reserve meets and it is expected US policymakers will illuminate on plans to reduce current monetary stimulus. Bond and currency markets have moved to reflect the reality of some degree of tapering, but equity markets are sitting on the sidelines.

The reaction to tapering in our domestic market could be distinctly different from the US and Europe as recent moves have been linked more closely to Asian markets  – China’s Shanghai Composite and Japan’s Nikkei. As we can see from the graph below, the S&P 500 in the red line has underperformed Asian markets by 3 per cent since the start of August.