What Happened to the AWC Share Price?
Westfield Group [ASX:WDC] stood at $10.84 a share today. The Reserve Bank of Australia cut interest rates today, as most expected it to. This takes Australia to a record low of 2%. It looks like the good run in equities and property is about to continue further. Investors will ‘let the good times roll’ until Australia returns into a tightening cycle.
Why Did This Happen to WDC Shares?
When you take a step back to look at the Australian market, you may find it very strange to know that we have been in a multi-year rally. No, we are not doing as good as the US market. The US market returned more than 70% in the last five years, while the ASX200 has returned only 30%.
Still, considering the economy and commodity prices have tanked so much, the equity market has done surprisingly well. Of course, when you think about it more deeply, you won’t find it surprising at all.
The reason that we are in a multi-year bull market is because things are bad!
When things are bad, central banks cut rates and pump money into the system. That helps all asset markets, because capital is cheap. Bear in mind, profit from investment-making comes from the total return of the investment minus the cost of the investment. When the cost of investment goes down, profit from making investments goes up.
How about ‘total return of investment’? Supposedly, great corporate earnings are the baseline driver of stock market return. And it is growth that produces good corporate earnings.
How can there be little growth and high stock market return? Well, because the cost of investment is so low that it makes sense to invest into assets other than cash and debt. Naturally, high yielding and high risk assets such as stocks and properties benefit.
What Now for the Westfield Group?
Will it all come crashing down? Well, it depends on which market you are talking about. The Aussie market is still below its peak level during the GFC. If real recoveries take place in China, Asia and Australia, then fundamentals will start to ‘catch up’ with inflated stock prices. This will make the bull market continue.
However, if recoveries don’t come and low interest rates persists for longer, then the market will eventually need to settle back to a fundamentally-justifiable level. After all, you can’t have poor corporate earnings supporting a ‘hot’ equity market forever.
Emerging Market Analyst, New Frontier Investor