It’s mid-2021. The ASX is at 9000. The Australian Financial Review front page is covering the short march to 10,000.
There are the usual comments from fund managers talking about how the market has gone too far and they are sitting in cash for the impending correction. There may even be some references to the market being driven by retail investors who “don’t get it”.
With the S&P/ASX 200 index going through 6000 this week, I decided to flip the first digit and started to think of a world of 9000. There’s already more than enough pieces on why the market is going down.
Back in high school, lacking both high levels of coordination and physical size, I ended up picking cross country and middle-distance running as my sports. One of the coaches was particularly keen on “visualisation” as a technique ahead of races.
Visualisation is a well-known sports psychology technique, where you think about how you’d feel at certain point, visualise your race in your head in advance; thinking through each part of it; living it in your “mind’s eye.”
Over the years in my investing career I’ve found this technique particularly useful around big exogenous events, where it’s easy to become part of the narrative and not see other paths. It helped just after the global financial crisis (GFC) when I was stuck on a bearish narrative in 2009.
Now, I believe, is the time to revisit visualisation. The starting point is to think of yourself talking to a friend in a year’s time about an event you currently think is implausible.
Importantly, try to think of what some of the pre-conditions that would be needed for that event to come true, which of course with humans’ hindsight bias, would be “obvious”.
The path to 9000
What would we need for 9000? First and foremost I’d nominate very loose monetary policy.
If we’ve learnt anything in the last 30 years it is that, whilst free money may not create consumer price inflation, it sure as heck helps get asset prices up. Hello, yield curve control, where the Reserve Bank of Australia has committed to pining interest rates to near zero.
You’d also probably need the economy to stabilise and perhaps exceed expectations, though GDP doesn’t need to be great. In fact, a strong recovery may be an issue as would threaten loose money policy.
The risk in the next six months is that things return to normal at a faster pace than expected. A “second wave” becomes much less likely if there is no community transmission.
There would need to be space for marginal buyers in the coming months – someone has to bid the market up after all. With the Merrill Lynch Fund Manager Survey sitting near 0/10, i.e. maximum bearishness, the current rally is one bereft of professional investors.
There is plenty of room for professionals to add to stock holdings. There’s also plenty of money to flow from asset allocators who have ploughed money into bonds at the peak of the pandemic.
And as the icing on the cake – you would need a bit of froth in the market.
At 9000 the valuation of the ASX will look stretched for institutional investors. That means we will need “tourists” – a term used to describe investors who don’t normally “live” in a certain market.
Retail investors could be the candidates for direct equities. Whether it’s from boredom, lack of yield alternative or lack of sports gambling, retail investing has exploded for the first time since the GFC.
And they’ve wiped the floor with institutional investors. They’ve made a lot of money and once someone tastes success, they usually want more. I can see this group buying the dips from here.
Put together, this may be 1999. I must say it feels implausible even writing that, given the recession we’re currently in and GDP well below trend with rising unemployment.
All this isn’t my base case and you can argue a lot of this is reflected in the price already. But few, if any, investors would have predicted eight weeks ago that we’d be here.
Our job is to see the world as it is, not as we think it should be. Closed minds at times like this are costly minds.
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Excellent article Chad
Very plausible. US yield curve has already steepened (banking sector will fly), USD Index has been in falling trend (mining will get a boost offset by rising AUD, offshore investments will return) and with widespread stimulus measures everywhere inflation will finally emerge, leading to ASX200 hitting 9000. I can hear bond managers muttering "sure.. pigs may fly" too?
Interesting.... Interesting. It took ten years for ASX to exceed the previous height prior the GFC. 9000 in 2021 sounds very bullish. All the stars need to be aligned perfectly. I hope Chad is right.
Great concept - "Visualising". 9000 - we've had a crack at it Chad - here's what we think - we'd need: A bank sector re-rating - to glamour status. Impossible without it. Huge part of our market. They would have to offer the reinstatement of dividends based on earnings based on profit growth. All of which might be tough - zero rates mean no margins. Could be a struggle. Resources to go up - possible - it requires a strong iron ore price which is based on global and mostly Chinese economic growth. Coal price recovery would help. A recovered oil price. That requires solid growth in the global economy. Bubbling consumer confidence spurring strong consumer spending. That would require a solid housing market. A much bigger technology sector (that's how the US does it - maybe Afterpay would have to become the biggest stock in Australia - Paypal is already 60% bigger than CSL and BHP so its not impossible). A perfect exit from coronavirus. A vaccine maybe. Confident containment if not. Travel borders open. Zero rates but not too negative. Money printing to be endless but not dangerous. A healthy but not stagnant level of inflation. All sprinkled with some irrational exuberance and a short memory. No Black Swans. One of my colleagues asks "What would we have to consider to visualise 900". Now we're talking... US dollar finally cracks under the weight of money printing. US bonds become a credit risk. The US loses its ability to borrow or fund existing borrowing. The US is effectively bust. Social unrest beyond out wildest imagination breaks out in the US. The Chinese currency becomes the de facto global currency peg. Rates go universally, really negative. The EU can't hold up its weaker Members. Lets them go. Woody becomes President despite being a joke Presidential candidate. Appoints Buzz Lightyear as Vice President. Buzz and Woody turn it all around. Might have to adopt this technique Chad. Thanks again for the article.
Marcus, thanks, as your articles take a bit to beat for readability. You guys also take the cake for visualising improbable scenarios. Like, as if a TV based character could really run for President, get elected by a minority of people and drive the market up...hang on.. But onto the market structure and 9,000. The AFR likes clickbait headlines so they went with an extreme number. Also hard to put everything into a 600 word limit. So as playing around with sector weightings for a friend on this yesterday. As you say with the Bank weighting they have to go up a lot for it to happen. That's the hardest part of the Rubik's cube of 9,000 to pull off. On resources - if Trumps mooted $1trn infrastructure spend happens and is replicated elsewhere, you'd only need China to stay the same to create a new marginal buyer. So the higher resources prices needed is more plausible, if not probable. Populists do things that are popular after all. We'd then need those earnings put on a lofty 30x P/E ("The 2021 Search for yield story?") say BHP - BHP's EPS of $2.50 USD per share (versus $1.70ish forward currently), 70c exchange rate, and 30x rather than the 16x fwd consensus today is north of $100 a share. Its what happened to GE and the US megacaps in 1999. The Tech sector is the other tough bit. US market structure has really changed in last 13 years, with Tech so large now and Energy etc shrinking. We haven't really. That said, with APT through $15bn market cap today, who knows - the joy of not having earnings is that P/E's aren't needed. "To infinity and beyond". Left field ideas for getting Tech up: forced non-USA de-listings from Trumps "USA first" sees Atlassian etc move to an Australian listing caught up in the China ADR purge? Thats $60bn market cap. RE the 900 - tinfoil hats all round. Always the easier list to think of that one.
interesting article... comments even more so... its all fun and games now, lets see what happens after jobkeeper expires [with no chinese tourists/students and chinese investments in housing... wont be pretty].. with housing down, banks down, retail down... etc etc
What will it take for the banks shares to rise? How about more Govt subsidies for housing? For example how about a $50,000 first home buyers grant for newly built property? A $20,000 for people building a new home, (even if they are not first home owners)? A further CGT discount for investors building new homes to rent for low income earners (e.g housing affordability schemes)? These and similar schemes would put a rocket under property prices, increase demand for bank loans, further increase household debt and increase bank profits. Result : increased bank share prices. Oh and the Govt can find the money: After all they found $60 billion in savings from money they did not need to spend on jobkeeper and job seeker.