ASX richly priced, valuations elevated, warns Perpetual strategist
The sharemarket rally that has taken the ASX 200 to new highs is unlikely to continue, one of the country’s largest investors has said, describing the outlook as “challenging”.
The warning from Perpetual’s head of investment strategy, Matthew Sherwood, came as Australian shares topped 7900 points for the first time ever on Thursday as gold, iron ore and lithium miners advanced amid a rebound in resource prices. The interest-rate-sensitive banking, property and retail sectors also climbed.
The S&P/ASX 200 closed up 1 per cent at 7896.9 points and topped its previous record close of 7847 points, achieved on March 8. It also reached an intra-day record high of 7901.2 points, topping its previous record intraday high of 7853.1 points on March 8.
The benchmark is up 4 per cent this year, an extension of a 7.8 per cent rally in 2023.
But Mr Sherwood said he did not expect the market to perform “particularly well” considering the subdued economic outlook. He said the Reserve Bank was unlikely to cut interest rates.
“The market currently is quite richly priced, and our valuations are elevated due to compulsory superannuation but the earnings backdrop to me looks pretty challenging,” he said, adding that the composition of the ASX meant it was “not favourably exposed” to the technology-driven bull market in the US.
“I think the economy is going to slow, and I don’t think our index composition is going to be much help because we’re not in a mining boom or leverage boom era any more.”
But there are plenty of fund managers who think the ASX has more to run.
TMS Capital portfolio manager Ben Clark said the ASX was running “on the back of the American market”. “Bull markets, they’re typically multi-year, around five years plus. If you look at America, they’re probably 12 months into this bull market,” he said.
Cyclical upswing
“We’re fairly early into a bull market. It still has some time to run. But it’s been an unusually long period of time since we’ve had a 3 per cent to 5 per cent pullback.”
Australian Eagle Asset Management portfolio manager Sean Sequeira said the gains in mining companies, which helped push the ASX to a record high, indicated a cyclical upswing and a higher degree of comfort with the outlook for the global economy.
“The banks’ rally had taken a lot of the money flow from some of the more stapled earnings stocks and now the market might be rotating into these cyclical businesses,” Mr Sequeira said.
Damien Boey, an equity strategist at Barrenjoey Capital Partners, said the stocks on the resources side had climbed on Thursday because of increased confidence that China, Australia’s biggest buyer of iron ore, was “stabilising the ship”.
“This is a better than expected outcome for many investors bearish about China,” Mr Boey said, pointing to chipmaker Nvidia as one stock that had “run very hard”.
“At the end of the quarter, there’s a bit of portfolio rebalancing required, so people are looking for alternatives,” he added.
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