Long road to recovery
Sydney Morning Herald
Wednesday September 23, 2009
It's easy to forget we are in the midst of a financial crisis when share prices have risen so strongly. Last week, Australian shares, as measured by the S&P/ASX 200 index, hit 4600 points €“ the highest level for the year. From its low in March of about 3150, the S&P/ASX 200 is up more than 45 per cent.The share price of junior uranium explorer and developer, Extract Resources, has risen more than six-fold over the past year. But it is not just the resources sector and the China effect that have pushed the market to its strongest rebound in history; investors are also supporting the big banks, whose share prices had been hammered over the past 18 months.Although it is likely the March low is behind us, the Australian sharemarket has rebounded too strongly for it to last. Markets have got a bit ahead of themselves and, eventually, there will be a pull-back.Fund managers say share valuations are becoming stretched, while there is scant evidence of stronger earnings growth coming through.The bounce is largely because of sheer relief that news on the economy is not getting any worse and better-than-expected profit results from Australia's big companies.In the year to March, the top 10 stocks by market capitalisation were savaged. Shares in big banks, in particular, were sold off. The Commonwealth Bank, for example, went from $40 to less than $30 over the 12 months to March but is now knocking on the door of $50 again after recently reporting a fall in profit of just 7 per cent. Still, it's some way off its all-time high of more than $60, recorded in late 2007.The big banks' stronger balance sheets and high credit ratings compared with many of their overseas counterparts was always going to stand them in good stead. They have been able to increase their market share over their non-bank rivals because of their cheaper access to credit.Low interest rates, two stimulus packages and the income-tax cuts that took effect on June 30 are doing their bit to support consumer demand. Australian listed companies have raised more than $90 billion from their shareholders as they seek to repair their balance sheets and reduce their debt.Shares have been offered to shareholders at deep discounts to their market price in capital-raising exercises over the past year.Those investors who have taken up the offers have enjoyed substantial windfall profits (although most of the gains have been enjoyed by institutional investors).The massive capital-raising exercises have undoubtedly been a factor in the market's revival. But the rise of optimism after the unprecedented stimulus packages by governments around the world has triggered big gains, similar to those seen in Australia, on almost all developed-country sharemarkets. Gains in some emerging-economy sharemarkets have been much greater. Chinese shares, as represented by the Shanghai Composite Index, are up more than 60 per cent since the start of the year.Australia's top 100 companies have now fully repaired their balance sheets, a prerequisite to a sustained recovery. A risk for the Australian economy, however, is if Chinese authorities increase interest rates to take some of the heat out of Chinese share prices.Another worry for sharemarket investors is what will happen once the Government's stimulus money runs out and the Reserve Bank starts lifting interest rates. Rate rises could start as early as October 6, when the Reserve Bank board next meets, or earlier if the banks decide to move first.The sharemarket recovery is likely to be a long and winding road. It will be years before the market surpasses its all-time high of 6800 points of November 2007. The recovery from the 1987 crash €“ probably a good guide €“ took several years to reach new highs.
© 2009 Sydney Morning Herald