Where to next for the Australian Stock Market?

The Australian stock market has returned a little over 30% in the last 12 months, which has been great for Australian investors.

But things might not be looking so rosy for the future.

The problem when significant gains happen in stocks is they become overpriced and further gains are hard to come by.

The Australian All Ordinaries Index reached a high on May 10th at 7419 but has fallen slightly since then and is struggling to find direction now.

In the recent ANZ Equity Market Outlook Quarterly, Morningstar analysts warn investors should approach the market with caution, saying equities in Australia and across the Tasman are overvalued.

As the price of Iron Ore and Gold has increased so too have our mining stocks. For further gains to happen, we need to see an already high iron ore price head even higher.

But that could be unlikely with the recent escalations in the Trade-War with China.

China is by far Australia’s largest trading partner, accounting for 39.4% of goods exports and 17.6% of services exports between 2019 and 2020, according to Capital Economics.

But Beijing has for months been targeting a growing list of imported products from Down Under — putting tariffs on wine and barley, and suspending beef imports.

Gross domestic product (GDP) in Australia could contract even more if Beijing continues to pile tariffs on more Australian imports, said its senior economist Marcel Thieliant in a recent note

Goods and services that are already “in the firing line” are worth almost a quarter of Australia’s exports to China — forming 1.8% of its economic output, the research firm said.

But it may not end there.

“That figure could rise to around 2.8% of GDP if China targeted other products for which it isn’t hugely dependent on Australian imports,” Thieliant said.

And it isn’t just the stoush with China that could bring problems for Australian stocks. Our brilliantly handled Coronavirus response is now set to cause us economic problems.

Australia has been a standout performer when it comes to managing COVID-19. But that is now going to cause us a problem.

We can’t re-open our borders because our vaccine roll-out has been too slow and with no virus running through our population we are very susceptible to outbreaks.

That means no international travel and no international immigrants or students. This will add a further drag on our economy.

So when we think about where the economic and corporate growth is going to come from next we are left scratching our heads.

Which sector should we look in to lead us in the next stage of the rally?

It is really hard to see where the growth is going to come from. The financial sector is fully priced. Mining is expensive and our information technology sector has fallen 12% in the first quarter after gaining 56% last year. Even Energy only managed to gain 3% in the first 3 months of this year after losing 30% last year.

The Australian economy has held up well for the first 12 months of the recovery, but we are about to enter a much more difficult time for stock investors. Stock returns are likely to be minimal from here on out.

The All Ords is up 6.6% in 2021. Not bad but could be a lot better.

The US S&P500 is up 10.8% in the same time. Why?

Because the US, hard as it is to believe after their 586,000 deaths and complete mismanagement of the risk, is now able to go back to full trade and open borders. 84% of their population has received the first dose of vaccination. 37.6% are fully vaccinated. The virus risk to them has now all but disappeared.

Unlike Australia, which lives with snap lockdowns as soon as we get 1 case in a city. Those lockdowns have businesses worried and they are not yet confident of future conditions.

Until Australia gets its borders open and stops these no-warning lockdowns, stocks will struggle.

The only way to make money in this environment will be by stock picking and to do that you need access to quality research.

If you are looking for a way to pick stocks then you should check out our Top 30 trading strategy.

For 2021, the strategy has generated returns of +27% far in excess of both the Australian and US Stock markets.

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Matthew Jones

Director Capital 19

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