The Australian stock market, as measured by the S&P ASX200 Index, rose by 7.7% in the June quarter extending the market recovery which began in earnest last November. The dividend payout ratio also improved leading to slightly higher cash distributions, though it is noted that the average dividend yield of Australian shares of about 2.8% remains significantly lower than the long-term average of about 4%.
The steady rise in share prices has been assisted by a pleasing rebound in corporate profits and the ultra-stimulatory actions of central banks, both here and abroad. Valuations have tended to be enhanced by the low discount rate, and a resurgence in merger and takeover activity has boosted confidence. Strong markets have also caused fever-pitched speculation in peripheral assets such as some cryptocurrencies, digital tokens and special purpose acquisition companies. There’s a bubble forming that will burst spectacularly before too long, and investors are urged to be careful about buying securites with little or no tangible value, and to understand exactly what it is they are buying.
For the 2020/21 financial year many shares in the more economically sensitive and cyclical sectors performed very well. Australian banks, which suffered tremendously in the pandemic drawdown last March, were amongst the best performers in the recovery phase. Similarly, mining stocks such as BHP had a good year, bolstered by record iron-ore export volumes and strong commodity prices. Commodities were supported by government stimulus and troublesome supply chain bottlenecks, which combined to create temporary supply shortages and utopian pricing conditions.
Another consequence of ultra-low interest rates is an increased investor appetite for infrastructure assets with regular cash flow and yield. Telstra was able to monetise its mobile communication tower assets by selling 49% of its InfraCo Towers business for more than expected, and both Sydney Airports and Spark Infrastructure have recently received unsolicited takeover bids.
The Australian stock market outlook remains satisfactory. On our assessment, the recovery in corporate earnings will continue, and the effect of low interest rates remain positive, at least for a while longer. Our market forecasting tool analyses profit growth data, bond yield forecasts and applies an equity risk premium multiplier, the result of which is a projected fair value for the ASX200 index of about 7750 points, about 6% higher than the current level.