Why Australia's share market is near record levels despite 'high risks' to the economy

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With Australia's economy growing at its slowest pace in decades and expectations interest rates could soon start to fall, analysts are warning there is too much 'exuberance' on the share market.

The ASX is trading close to record highs after a lacklustre corporate reporting season, a phenomenon which has puzzled analysts.After hundreds of Australia's biggest companies reported their half-year or full-year financial reports, analysts said many profits were not stellar.

In the past few weeks, hundreds of companies opened up their books to deliver full and half-year results to investors, giving Australians a look at just how the corporate world, and the broader economy, are faring. With growth at the slowest pace in Australia since the recession of the early 1990s, we are now faced with an ongoing economic crisis in China — our biggest trading partner — and the prospect of a global economic slowdown.

Despite the gloomy picture, the ASX is trading close to record highs as investors anticipate central banks will deliver significant interest rate cuts in the months ahead. At this stage, money markets are betting the RBA will start cutting rates from February, but they have been frequently wrong in the past.Globally, stock markets are sitting just below record highs, including here in Australia, despite last month's brief burst of volatility.

"And given the high quality of Australian companies, particularly the larger caps on the listed equity market, we believe that valuations that are at a higher level than the historical average are justified because these businesses have shown themselves to be able to navigate business cycles so well."

"Certainly what we're seeing — and this fits in with the winner-takes-it-all cycle that we're in — the best retailers, the best banks, the best industrial companies are weathering the storm so much better," he said.But smaller and medium-sized businesses are not faring as well, Mr Schellbach said, as they struggled with cost management, the ability to maintain profit margins and losing market share to more dominant brands.

It is basically a comparison of the company's share price with its estimated "earnings per share" over the next 12 months. On that measure, CBA's score is 24."Twenty-four times earnings puts them in line with a high-growth company, like a tech company that's inventing new technology and finding new markets," he said.

"Although it might not happen next week or next month, I do expect the returns from here for the banking sector are quite limited.Consumers resilient but not across the board

 

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