A belated congratulations to the All Ordinaries for posting a 25% gain in the recently-ended fiscal year (28% if you include reinvested dividends). It was the single-best year for the Aussie index in 20 years – just before the 1987 crash – and came after a 19% gain in the last fiscal year, a 19.8% gain the year before that, and a 17% gain the year before that.
If you’re scoring at home, that’s four years of double digit gains, with the fourth year the strongest of all. What drove the Aussie market higher than London, Hong Kong and New York over the same period? Well the easy answer would be to say “resources”. The correct answer, however, is money.
Superannuation assets topped AU$1.1 trillion in this fiscal year. Some of that money went to blue chips. And some went into the 226 IPOs that occurred over the last twelve months, up 36% from the year before. Eight of the top ten IPOs were resource companies. Expect to see more of them.
Then there was the buy-out and merger boom. Australia saw AU$116 billion in mergers and acquisitions in the last year. The soaring market and strong dollar (at twenty-two-year highs against the kiwi and 18-year-highs against the greenback) sucked in carry traders, oil money and anyone else looking for yield and capital gains. Overseas investment in Australian companies rose by AU$34 billion.
Money, money, money and more money. It’s what makes markets go up.
It doesn’t hurt that earnings are growing, which in turn has kept P/E multiples and thus valuations from becoming dot.comical. But will the earnings growth continue? In the resource industry, 2006 saw earnings driven more by volume than by price increases (for the first time in three years). What happens if commodity prices come down faster than export volumes go up?
Markets and Money