The Australian stock market has been on a tear recently, with the S&P/ASX 200 Index up more than 10% for a few years. Investor sentiment has been buoyed by expectations of strong economic growth, supported by healthy corporate profits and low-interest rates. However, recent data suggest that these expectations may be too high, and that reality may not match investor optimism. This article will explore the reasons for this discrepancy and discuss what it could mean for the Australian stock market in the coming months.
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Economic growth is expected to slow in 2022
One of the key drivers of the stock market economic growth. When the economy grows, businesses are more profitable and can pay higher dividends to shareholders. However, recent data suggest that economic growth in Australia is set to slow in 2022.
The Australian Bureau of Statistics (ABS) released data this week showing that the economy grew by 0.4% in the September quarter, below expectations of 0.6%. It followed two-quarters of solid growth, driven by government stimulus spending during the pandemic. However, with this stimulus set to wind down in the coming months, economists expect growth to slow to around 2.5% in 2022, below the 3.25% expected by investors.
Corporate profits are under pressure
Another key driver of the stock market is corporate profits. When profits grow, companies can pay higher dividends to shareholders, and share prices tend to rise. However, recent data suggest that corporate profits in Australia are under pressure.
The ABS released data this week showing that company profits fell by 2.8% in September after rising strongly in June. It was driven by a decline in commodity prices and weak consumer spending. Analysts expect profits to continue under pressure in the coming months as the economy slows and commodity prices remain low.
Interest rates are expected to rise
Expectations of low-interest rates have also buoyed investors. Low-interest rates make it cheaper for companies to borrow money and expand their businesses, which can drive up share prices. However, recent data suggests that interest rates are set to rise in the coming months.
The Reserve Bank of Australia (RBA) released minutes from its October meeting this week, noting that interest rates are expected to rise “gradually” over the next few years. It is in line with expectations from market economists, who expect the RBA to begin raising rates in 2024.
Market valuations are high
Another factor to consider is market valuation. This measures how expensive shares are relative to earnings, dividends or other measures. When valuations are high, it means that shares are more expensive than they have been in the past, and investors may be more hesitant to buy.
Recent data from the ASX show that the market is trading around 25 times earnings, which is well above its long-term average of 15 times. It suggests that shares are more expensive than they have been historically and that investors may be overpaying for stocks.
Political uncertainty could weigh on the market
Finally, it is worth noting that there is a significant amount of political uncertainty at the moment. The Australian government is currently amidst a leadership crisis, with Prime Minister Scott Morrison facing calls for his resignation. Additionally, there are concerns about the ongoing trade war between China and Australia, which could weigh on economic growth.
These factors could all weigh on the stock market is in the coming months. While there are some positive factors to consider, such as substantial corporate profits and low-interest rates, investors must be aware of some significant risks. Given this, it is vital to keep a close eye on the market and monitor developments closely.
How to start trading in the Australian stock market
If you’re interested in trading in the Australian stock market, there are a few things you need to know. First, you need to open an account with a broker. Many online brokers offer services to Australian investors, so shop around and compare fees before choosing one.
It’s vital to remember that the stock market can be volatile, so don’t invest more money than you can afford to lose. Start with small amounts and only invest in companies you research and understand.
If you’re new to investing, many resources are available to help you get started, including books, online courses and blog articles. The most important thing is to take your time and not rush into anything.
