Investor sentiment on edge

The Australian stock market has risen over the past five consecutive months to now be trading at its highest level since December 2007, and is only around 4% from its all-time high.

Following the post-election run, the Australian market has cooled this week falling around 1%, which is not surprising. In fact, after a stellar run in the first quarter of 2019, the market momentum has slowed by around 80% over the past two months. So is this due to the uncertainty of the federal election or something else?

The RBA is set to meet early next week to decide on a potential rate cut. While many are predicting this is inevitable, economists are also indicating we may see another one to two rate cuts throughout 2019. While I believe any cut to interest rates may be a little premature given the surprise election outcome and the likely cash stimulus to be injected into the economy with the $158 billion tax cut package, I am sure there will be many other factors on the RBA’s mind when they do meet.

There has been a lot a speculation of late that the Australian stock market would crash following the election and the pending outcome of the US-China trade war. Analysts have been pushing the idea that Australian stocks are overvalued and, therefore, at risk of a pullback. But from experience I can say that these comments are often made with the intent to inflict fear into investors to increase volatility and push prices down, so the big end of town can take advantage of market emotions.

It is normal for investors to be concerned about the erosion of profits made during bull markets, however, listening to speculation rather than sound logic can often lead to reactive decisions based on fear, which is usually an investor's biggest downfall.

I question how the experts are speculating that the Australian market is so over-priced when it is yet to reach its all-time high set nearly 12 years ago in 2007. In comparison, other major markets around the world have made consistent new all-time highs. I would agree that the US market is slightly over-valued and due to slow from its stellar run, with the uncertainty surrounding the trade war between China and the US potentially being the catalyst for this to occur.

What’s important is that we don’t get too caught up in this speculation, as it can lead to poor decision making given that not all stocks are over-priced. Overall, the Australian market is bullish, and I believe it will continue to be so, as company’s report record profits and strong growth figures.

As for the sectors, Information Technology gained 2%, which was supported by a number of WAAAX stocks, such as Wisetach and Apen rising by 8 and 11% respectively. Computershare also rose by 1.44%. The Communication Services sector was the next best performer up around 1%, while Utilities and Consumer Staples where the worst performers this week, with each sector down by around 2.6%.

In the ASX 200, Vocus was the top performer rising over 18% following news of a takeover bid, and if you don’t currently own the stock, you have missed the boat. Lynas also rose strongly for a second week, up 16% on news that China would potentially ban the export of rare earths to the US.

Costa Group Holdings was hit hard this week after an earnings down grade, and was down around 24%. That said, I believe the decline was an overkill, but it may now draw attention as a takeover target, so, I recommend keeping an eye on it. Pact Group, Bluescope Steel and Elders were all also down over 10%.

So what do I expect in the market?
Although momentum has slowed a little, I believe that the market had its low two weeks ago and we should see it rise for at least the next few weeks to challenge the previous all-time high. While unconfirmed, I believe the market will be bullish throughout June and will possibly reach a new all-time in early July before falling into its next low.

Right now, there are plenty of opportunities to profit from good stocks with Energy, Healthcare and Materials my preferred sectors.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au