So local markets have had their fourth year of outperformance.
After rising 25 per cent in the year to last Friday, June 29, Australian shares have had their best financial year since the year to June 1987 when shares rose 49.6 per cent.
The All Ords was up 24.9 per cent, the ASX 200 rose 23.7 per cent.
The performance would have been better if not for the 1.5 per cent drop last week.
As heady as the past four years have been, it's nothing like the last great boom in 1987.
The market of course surged,then collapsed in October 1987, which ushered in the start of the slide down to around 1100 points on the All Ords and the start of 'the recession we had to have'.
(And those investors who were not scared off or highly-geared and held on to their shares, are looking at returns of over 500 per cent in simple terms and the best part of 650 per cent or more including dividends).
But the AMP's Dr Shane Oliver points out that there is a crucial difference between now and 1987.
He says it is worth noting that the 110 per cent gain in share prices over the last four years has actually been less than growth in profits of 133 per cent over the same period, in contrast to the 191 per cent rise in the share market over the four years to June 1987 which was only accompanied by a 62 per cent rise in profits.
In other words, valuations so far have not run ahead of the underpining for market performance: corporate profits.
That's an argument the Reserve Bank has used to make the point that even at present price levels, the local market isn't overvalued. This is still a mostly earnings-driven market, although the influence of hedge and private equity funds in the latest year cannot be discounted.
In the same time corporate profits has risen as a share of national income, while wages and salaries have fallen, so pressure on margins from rising wage cost is not a factor and hasn't been for some time.
Dr Oliver believes the Reserve Bank won't move interest rates this week.
Here's his outlook for the year ahead.
•Outlook for markets over the next financial year
The next 12 months are likely to be characterised by: ongoing de-sychronised global growth with the US remaining soft for the next six months at least, but the rest of the world remaining solid; robust growth in Australia, modest inflation and benign interest rates – falling in the US, but rising modestly elsewhere.
This should provide a reasonable backdrop for investment markets.
• Share markets are likely to continue higher:
On the back of still reasonable valuations, solid profit growth and a strong flow of funds into shares.
We still haven't seen the sort of euphoria seen at market tops. (I am yet to find a cabbie telling me to buy shares.)
However, the ride is likely to be volatile as we have now entered the most risky phase of the bull market with share prices starting to rise a bit faster than earnings and liquidity conditions gradually tightening.
While US sub-prime mortgage problems have the potential to linger in the short term, the environment is likely to be pretty much like that in the second half of the 1990s which saw a rising trend in volatility, rising credit spreads as corporate debt levels rose, occasional financial problems (such as LTCM in 1998), but still rising share prices.
• The Australian share market has been stuck in a range between about 6200 and 6400 for the last two months, but is likely to soon break decisively through the 6400 level, and past experience suggests that when it does, it will be followed by a quick run-up to around the 6600 level.
It's highly doubtful that the recent flood of superannuation inflows have been fully invested and Future Fund assets are also likely to be supportive.
Australian shares are likely to continue outperforming global shares helped along by the resources boom.
• Bond yields are likely to range trade.
The ongoing US housing slump and falling US inflation will keep a lid on bond yields and may even drive a fall in the short term. Furthermore, bond yields in the US, Australia and Europe are already around or above long-term sustainable levels.
After a rough start to the year listed property securities are now good value or cheap on some measures and should provide solid gains over the next 12 months, but are likely to under perform shares generally.
Unlisted assets such as infrastructure and directly held non-residential property are likely to continue generating strong returns. Office and retail vacancy rates are very low, property space demand is strong and investor demand is continuing to push yields lower.
• The path of least resistance for the $A is up
Probably to the February 1989 high of US$0.8950. Commodity prices are still running around levels more consistent with parity to the US dollar and the interest rate differential versus the $US is likely to widen.
