Rally digs in to last

We've heard all about sustainable stockmarket rebounds but this time the signs are more promising.

We've heard all about sustainable stockmarket rebounds but this time the signs are more promising.

Is the Australian sharemarket rally that started in the middle of this year the real thing, or another cruel trick on long-suffering shareholders?

Over the past year the returns on Australian shares, including dividends, is more than 14 per cent.

The share prices of Australian resources company have been hit hard by slowing Chinese growth and lower commodity prices. Over the past year the big miners, such as BHP Billiton and Rio Tinto, have share prices that are between 10 per cent and 20 per cent lower. Over the same period, health stocks are more than 30 per cent higher. Investors chasing yield have pushed the share prices of the banks and Telstra more than 20 per cent higher.

Even though share prices are higher than a year ago, the rally has really been on since mid year, after the market fell heavily during May, mainly due to problems in Europe.

Since the start of June, Australian share prices are more than 10 per cent higher.

Investors could be forgiven for being sceptical over claims that it's different this time, given the rallies in Australian shares since the GFC have proved to be short-lived. But it is not just the Australian sharemarket that is doing well. There are rebounds in most major world sharemarkets, with the MSCI World ex-Australia Index up almost 14 per cent for the year to the end of September. In fact, US share prices have done so well that they are only 10 per cent below their all-time high of October 2007.

Australian shares, however, despite the good run of late, are still about 35 per cent below their all-time high of November 2007.

The chief economist at AMP Capital Investors, Shane Oliver, says US shares have been doing better for longer because the US has had very low interest rates, fiscal stimulus, and a low dollar for some time. He says the main reason for the improvement in Australian shares is the Reserve Bank's cuts to interest rates.

Any setback for Australian shares would probably come from overseas events rather than domestic factors.

The chief executive of Lincoln Indicators, Elio D'Amato, says the US sharemarket has "run hard", and anything that runs up that quickly is bound for a bit of a correction, with chances that Australia's sharemarket would correct by even more. That is despite the Australian economy being in a position of relative strength compared with the rest of the developed world. Unemployment in Australia is rising, albeit from low levels, but that is likely to confirm the Reserve Bank's bias to cut rates further, D'Amato says.

Just as the high Australian dollar is hurting our exports, it is also having a dampening effect on our sharemarket, he says. That is because the high Australian dollar makes it expensive for foreign investors to buy Australian-dollar-denominated assets, particularly shares in Australian-listed companies.

Oliver says there are still three worries. The first is Europe, where it remains to be seen whether Greece receives more assistance from the European Central Bank and whether Spain will apply for assistance.

In China, there will be a leadership change next month and markets will be watching to see if Chinese authorities do more to boost growth. In the US, there is a looming "fiscal cliff". If Congress and the White House fail to agree on the federal budget, automatic cuts will be made to government spending and taxes raised. But it is unlikely politicians would allow that to happen, as it could drive the economy into recession and they would be blamed.

Oliver says, taken together, the risks are not as high as a year ago.

He is more optimistic about the rally's sustainability this time, though setbacks can be expected along the way.

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