The Australian Stock Market
With the asset prices of residential housing out of control, what about other asset classes such as stocks? Are they overvalued as well?
As mentioned, the wealth effect stemming from over inflated house prices and high consumer confidence has helped to drive the economy or if anything, overdrive the economy. The effects of this have been seen in the Australian Stock Market.
Double digit growth has been the norm for the last three financial years, with the ASX 200 index doubling in four short years from April 2003 to April 2007. Prior to April 2003, it took 11 years for the ASX 200 index to double. The solid growth has seen just about everyone have a flutter, as it is almost impossible to lose money in this present environment. Lets just hope, investors don’t get too complacent.
Australia has about the highest recorded level of per capita participation in the share market in the world; a majority (55 per cent) of adult Australians own shares, either directly (44 per cent) or indirectly (Australian Stock Exchange 2005). Fluctuations in the value of oft-cited indices of market performance, the S&P/ASX200 and the S&P/All Ordinaries, will naturally be a matter of concern to these investors because share prices reflect estimates of future profits. Perhaps everyone, not just investors, should follow the twisting fortunes of the market because they also foreshadow what’s in store for the real economy.
As it happens, the theory and evidence on the association between changes in share market prices and the economy do not support such an inference. There are at least three reasons why there is not a strong association between share market prices and economic growth: competition, market efficiency or rather inefficiency, and alternative sources of capital.