Is the share market well positioned for a record run?

The recent pull back in share prices combined with a volatile earnings season has positioned the Australian share market for a stellar run.

With the increased uncertainty in the market over the past six months surrounding the US China trade war and talks of an impending recession, it has been hard for investors to watch their portfolios rise and fall in what seemed like an erratic roller coaster ride.

August added increased volatility with reporting season, so it’s no wonder many have found it difficult to take profits or to predict which way the market is heading, with many questioning whether they should sell their shares or weather the storm. Nothing raises fear or emotions quicker than uncertainty and speculation.

Since achieving an all-time high on 30 July, the market has fallen nearly 7 per cent before turning to rise back up around 5 per cent. So can investors now start to regain confidence in the market and look forward to the next rise? To understand this, we need to look at the bigger picture.

I strongly believe that the main contributors to Australia’s development over the coming years will come from growth in exports to neighbouring Asian countries, such as China, Vietnam and India. Each of these countries are growing strongly and they look set to continue this growth for some time to come.

In addition, with interest rates at a record low of 1 per cent, there are two things that could unfold. Companies will improve their balance sheets by reducing debt and increasing profits or they will borrow money to grow, both of which is likely to lead to increasing in investment in Australian businesses.

Lower interest rates can also lead to consumer confidence as they have the opportunity to deleverage and reduce debt, and the more this occurs the more confidence will come back into the market. It is also an opportunity for those who are more cashed up to get into housing and other asset classes.

The low interest rate environment and changes to lending requirements should make it easier for Australians to borrow to invest in the housing market. We’ve also seen in recent years that property prices have been negative or relatively flat across Australia as a whole.

That said, while there are signs that this is changing, a combination of low interest rates and slightly more affordable housing prices could be another factor which impacts Australia’s growth over the coming few years.

Given the above, we are well positioned for a significant rise in the market, and I believe the best opportunities to build wealth in the coming years will come from the share market.

If you are looking to take advantage of the next bull run, my advice is to buy good quality stocks in the top 50 blue chip companies, as these stocks will drive the market. The sectors that are likely to perform strongly include Technology, Materials, Healthcare and Financials.

Looking at the sectors this week, financials was the better performer for the first time in quite a while up over 2 per cent, which could be a sign of things to come. Materials and Utilities were also up over 1 per cent while Information Technology was the worst performer down around 5 per cent and Healthcare was down over 4 per cent. For the calendar year, Healthcare and Information Technology are still two of the biggest performers up 23 per cent and 28 per cent respectively.

Looking at how the to 100 stocks performed, Adelaide Brighton (ASX:ABC) fell heavily in August before recovering strongly this week to make up what it lost the last four weeks. Alumina Limited (ASX:AWL) was up over 10 per cent in what looks like the start of a new bull run although it’s too early to tell. While CYBG was a big loser last week before rising over 10 per cent this week although I wouldn’t get too excited about this one.

So what do we expect in the market?

Over the last four weeks, the market has traded higher, easing investors’ concerns. That said, the current rise could just be the calm before the market turns to fall into its yearly low that I have been expecting. If this is correct, then we are at or very near the tipping point for that to occur.

Given this, over the next month I expect the market to fall for at least two to four weeks by over 5 per cent from current prices, which will see the market trade below 6,400 points although it is possible it could fall by as much as 8 per cent from current levels. As I have previously stated, this fall is expected and nothing to be concerned about. Once the market does pull back, we will see a strong bull market unfold.

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-----------