The US stock markets just closed at record highs. Not just one of them, but all three major indices. The Dow Jones Industrial Average, the NASDAQ and the S&P 500.
The team at Morgan Stanley think it’s an ‘epic level’ of mispricing.
Or as they put it in Market Watch:
‘We say this not as hyperbole, but based on a quantitative perspective.
‘Dispersions in valuations and growth rates are among the lowest in the last 40 years; stocks are at their most idiosyncratic since 2001.
‘And equity hedge fund beta is at its highest since March 2008.’
I think they mean the world’s gone crazy?
But not as crazy as the crypto market, it would seem.
Bitcoin just hit US$4,939 three days ago. And some are now saying US$10,000 per bitcoin is a real possibility in the next six months.
A lazy 100% six-month return. Anything’s possible in this market, so I wouldn’t be surprised.
And then there’s Australian property. The gift that keeps on giving. For those lucky enough to be on the ladder, of course.
Even the Spanish market is up strongly recently. Despite the unfolding Catalan troubles.
The boom times are here for everyone it seems…
Well, not everyone.
Sitting by itself in the corner while the party rages around it is the ASX.
The poor old Australian stock market is lagging behind in this period of record highs.
In fact, it still needs to rise about 17% to get to the levels of 10 years ago.
It’s frustrating for Aussie investors. Not to mention bad news for your superannuation fund.
Australian super funds on the whole have a strong bias towards domestic over international shares. And a 10-year boom cycle is a long time by any standards. It’s the longest rally in Japan’s history, and the second longest in America.
So has the Australian market missed the boat?
Will an impending bust — as suggested by Morgan Stanley’s analysis — hit our chances of joining the record high club?
Or is the slower pace actually a gift? An opportunity to jump aboard at reasonable levels?
It’s really down to this…
A tale of two sectors
The ASX all ordinaries is the index you measure the strength of the market by.
But it’s really an indicator of two main sectors.
One of which is stalling. While the other remains in the doldrums.
I’m talking about banks and mining, of course.
Together they make up around 50% of the total ASX200.
For our market to get anywhere near record highs, they both need to be firing on all cylinders.
There’s simply ‘no show without Punch’.
Check out the chart:
Source: Incredible Charts
[Click to open new window]
The pink line is the financial services index, the blue line is the ASX200 and the bottom line is the materials index.
As you can see, mining has dragged the performance down in the last 10 years. And financial services are moving sideways.
What are their prospects like now?
I’ve talked in the last few weeks about the coming threat to the banking industry. How a wave of innovation in financial services could end their monopoly power.
Just last week innovative financial planning software provider, Netwealth announced plans for a $900 million float.
So on the one hand, if the competition is coming from within Australia, this is a good thing. Our market should be a hotbed of ideas. That way we can create companies to compete internationally.
But if the threat comes from overseas, then this won’t be so good for our bloated financial services industry.
This story will take time to play out. And the banks are still in the box seat if they can manage the threat.
But Australia really need to get moving on financial innovation. Even if that would be bad for the big four banks.
The bigger risk to this sector, in my opinion, is the exposure to the property market.
And it feeds into a theory I have which will be bad for them but good for the second sector.
You see, despite high government debt around the world, every country from the US to China have drawn up massive infrastructure plans.
China has its ‘Silk Road’ project, a plan to build roads, bridges and utilities across the ancient trading route into Europe.
The US has its Mexican ‘wall’ project. But it also has a $1 trillion infrastructure upgrade plan that Trump promised during the Presidential campaign.
In a world of low interest rates, such projects can be attractive propositions for private investors.
I expect that if these plans come to fruition, it will be private money that funds it. A 7% return looks pretty attractive to a lot of funds right now.
And this is potentially good news for Australia’s mining industry. Infrastructure projects need materials. Rising copper, iron ore, oil and other metals prices.
In the past 12 months commodities markets have been showing signs of life. Perhaps an early alert into this story?
In fact, that’s where I see the opportunity for investors.
But here’s the conundrum.
A mining boom is good for the mining states. But it could put pressure on interest rates to go up. That’s not so good for property owners with big mortgages.
The fortunes between the Eastern states of Victoria and NSW and the mining states of WA and QLD could rapidly reverse.
A perverse outcome of the ‘winners curse’.
Danger and opportunity for the Australian stock market
It’s no coincidence that the symbol for danger and opportunity is the same thing in Chinese.
Which is a crucial point for you right now.
As I see it, if the ASX is to have a chance of getting to new record highs, it needs growth in the mining sector.
But at what cost elsewhere?
If interest rates go up and the world continues to boom, the fallout could be bad for some. Especially for mortgage holders. This has a knock on effect on banks, which are already dealing with the coming threat of the global fintech trend.
With this in mind, I think it’s time for you to focus on managing risks. While at the same time looking for strategic opportunities.
And the two big sectors of the ASX contain a bit of both right now.
Editor, Money Morning