Stock Market Likely to Trade to 8,600 Points

Due to the COVID pandemic, Australian banks have dramatically increased their liquid reserves in order to handle any issue that may arise, such as an increase in loan defaults. In the seven years prior to 2020, the banks liquid reserves to asset ratio has typically been around 1 per cent although this increased to approximately 4.25 per cent in 2020.

While Australia went into a brief recession in 2020, the impact on the economy was not as bad as expected, and consequently, Australian banks have been holding significant amounts of cash for quite some time.

CBA announces share buyback offer

Low interest rates has meant banks have been able to access money in the wholesale market at extremely affordable rates, which has resulted in an increase in lending with statistics from the ABS showing that the value of new loan commitments has almost doubled in the last year.

In addition, we are now seeing banks initiate share buy backs and other capital management strategies. Last Wednesday, Commonwealth Bank announced an off market share buyback of up to $6 billion of CBA shares. So, if you are a shareholder, a buy back is good news given that they generally underpin the share price while the buy back is being conducted and into the future, as there is less shares traded on the exchange.

If you don’t currently hold CBA shares, then there is limited upside to buying the stock in order to participate as buy backs can also cause the stock price to stagnate a little. CBA also delivered more good news last week with the announcement of a $2 dividend, which is back to pre-COVID levels and up 30 per cent on the March 2021 dividend payment. Overall, I believe the outlook for CBA moving forward into 2022 is good with the broader Finance sector likely to also do well next year.

What were the best and worst performing sectors last week?

The best performing sectors included Financials up 3.10 per cent followed by Utilities up 2.29 per cent and Communication Services up 2.10 per cent. The worst performing sectors included Industrials down 1.05 per cent followed by Information Technology down 0.22 per cent and Materials just in the green up 0.12 per cent.

The best performers in the ASX/S&P top 100 stocks included QBE up 12.21 per cent after announcing it had returned to profit followed by Downer EDI up 11.99 per cent and Challenger up 9.14 per cent. The worst performing stocks included RIO down 7.45 per cent followed by Northern Star Resources down 6.54 per cent and REA Group down 6.07 per cent.

What's next for the Australian share market?

Reporting season is underway in Australia and so far the results have been positive for some of our larger companies, which may result in the Australian market trading higher in a sustained move. Telstra and insurance companies, as well as the long suffering AMP all reported positive results with their respective share prices rising, driving the market up. The US market is just finishing its reporting season with over 80 per cent of companies announcing improved results and I suspect we are following suit.

We need to be mindful that the results are for the previous financial year and as we are only one month into the new financial year, and over half of our population is in lockdown, we are likely to see a different story, at least in the next one to two quarters.

Right now, the market is bullish as it has opened at or near its low and closed at or near its high over the previous two weeks, which is a very good sign. Given this, I believe the market will continue to push towards 8,000 points and beyond possibly reaching 8,600 points in the near future. That said, we are due for a high in the next month or so with the market likely to fall into its next low in the last quarter of this year.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.