A lot has changed since November 2007. Back then, John Howard was still prime minister, you could buy a nice house in Sydney for less than $500,000 and no one had ever heard of Instagram.
It was also the month when Australia’s benchmark stock market index, the ASX200, reached an all-time high of 6,828.7. With the full extent of the US subprime crisis still hidden, all seemed set fair for the local market to continue growing on the back of the mining boom and strong banks.
But as the global financial crisis bit, the market plunged, hitting a low of 3,765.9 in November the following year as banks and financial institutions in the US and Europe collapsed.
Australia was spared the worst effects of the crisis; the government guaranteed bank borrowings and deposits, helping to stop any of them collapsing, and stimulated the economy by handing out cash to households.
But the Australian market has not seen its pre-crisis heights again – until now. Helped by the Reserve Bank’s two cuts to the cash rate and the prospect of more cheap money to come from Martin Place and from central banks in the US, Europe and Japan, the ASX200 was within 50 points of its loftiest peak at lunchtime on Wednesday.
And in morning trade the broader all ordinaries index, which takes in the market’s top 500 companies, broke its previous record of 6,873.2, also set in November 2007. The index rose 54.2 points, or 0.8%, to reach 6,866.7 shortly after midday.
This is happening despite an economy that is seeing weak overall growth and is being propped up by the lowest borrowing costs seen in Australia.
Michael McCarthy of CMC Markets in Sydney said the expectation of lower interest rates for longer has given the market a big leg-up. The expectation of more rate cuts to come around the world has reinforced the idea that bad news for the global economy is good news for stock markets.
“We are living in historic times,” he says. “In the period since the central banks launched their response to the GFC, we have seen many occasions when good news has been bad news for the markets.
“It’s certainly a concern and a potentially dangerous situation. We are within a few percentage points of an all-time high and the US market is already there at record highs. But there is a lot of concern about where we are at in share markets.”
Not all the gains seen in Australia are linked to global factors. Hugh Dive of Atlas Management said the market had been driven by the two largest sectors, mining and banks, which had benefited from factors not directly linked to the global economy.
For miners, January’s dam disaster in Brazil had cut off supply and pushed up iron ore prices above $100 a tonne, sending the share prices of the mining titans Rio Tinto, BHP and Fortescue higher.
The banks, after an “ordinary” 2018 beset by the royal commission woes, had benefited from the surprise Liberal election win in May along with RBA rate cuts.
“These are reasons not to do with the global economy,” he said. “The two sectors together are close to 50% of the whole ASX so that explains the rise.”
But looking forward it was “hard to see where the next leg-up will come from”, given that investors would have to find value to push prices higher.
But while the boom in Asian economies, especially China, has played a major role in helping the ASX recover, headwinds are gathering to the north.
Capital Economics says it expects economic growth across Asia to remain weak this year, with many countries set to grow at their slowest pace in a decade. China has stabilised thanks to a still-buoyant property sector but Capital forecasts that it too will eventually have to face reality and be scaled back. South Korea’s economy is so weak its central bank has cut rates along with its Indonesian counterpart, while Singapore’s loose fiscal and monetary policy will struggle to offset the drag from weaker export demand.
David Bassanese, chief economist at Beta Shares in Sydney, said the ASX’s rise was due to a combination of factors but shares were driven higher as investors sought better returns.
“Equities have also been relatively good value as a result of the ultra-low interest rate environment,” he says. “The rates of return on bonds and ash are incredibly low and therefore dividend yields on equities are compelling.
“That’s also good for the future outlook because the search for yield will keep pushing share prices higher. And if inflation stays low the RBA and the government can keep throwing stimulus at the economy.”