Australian Stock Market on Fire: Why Invest in 2020

Over the last few months we have seen a number of catastrophic fires hit our country while at the same time the Australian stock market has also been on fire rising over 5.5 per cent since early November and over 5 per cent in January alone. We all know that the bush fires will eventually be extinguished but what we don’t know is at what cost to our economy and how this will affect the stock market. 

Australian bushfires to impact Australian economy

There is no doubt that the bushfires will impact the Australian economy as government funds are diverted to the relief effort. Further, given the severity of the fires in the farming community, we will initially see agricultural output fall along with tourism and lost jobs in the fire impacted zones. So while the economic cost is unknown at this point in time, it is expected to eclipse the impact from the Black Saturday fires at $4.4 Bn. That said, let’s not forget that the ongoing drought in Australia has already had a significant impact on our economy.

We also need to consider the impact on tourism in Australia as graphic images of the bushfires and dangerous smoke conditions are shared with the world, which means international tourists are likely to choose alternative destinations for their holidays in the coming months. All of this will have a flow on effect to various companies in the stock market.

As with any catastrophe there are always casualties and with bushfires it is always the insurance and agriculture industries. While insurance companies manage their risk through reinsurance, they are still exposed to these large natural disasters. Farm services and equipment suppliers may also be hit hard.

There are also many service industries supporting the agricultural and tourism industries that will be disrupted. Banks will also be affected as those who have lost their jobs or are temporarily out of work will be unable to pay their mortgages. Consumer spending may be also be temporarily impacted.

While all of this is likely to have a negative impact on the Australian economy, I also believe it will be short lived. Humans adapt to situations and rebuild very quickly, and I believe the economy will be the winner over the next few years, as the relief effort will have a positive impact on the economy.

We will see a boost to construction, roads, power and many other services supporting the reconstruction, which will bring with it jobs and require greater demand for raw materials. On top of this we have the human factor, as people effected will be purchasing all manner of items for themselves and their homes.

With every negative there is always a positive and while the fires have been devastating, the sun will shine again and many positives will come from it.

Best and worst performing sectors in the Australian market

The market was very bullish with the Information Technology sector leading the way up by around 3.5 per, while Consumer Staples and Financials were up around 2 per cent last week. The worst sectors were Energy, which was just in the green while Utilities and Healthcare were up around 1 per cent.

The best performing stocks in the ASX top 100 last week include Evolution Mining up around 8 per cent, followed by CIMIC up over 6 per cent and Challenger up over 5 per cent. Surprisingly, even with the fires raging around the country, QBE Insurance was up over 4.5 per cent for the week. The worst performers include Pendal Group and Virgin Money. Despite doing very well over the past two months, both have fallen over 6 per cent. A2 Milk was also down around 1 per cent.

What's next for the Australian share market?

As I have already stated, the Australian stock market has been on fire this month but yet again we are hearing doomsayers come out stating that the market is overheated and to be careful. We have been hearing from these pessimists over the past four years that the market will crash, yet it has risen over 30 per cent during that time. If investors had listened and stayed away from the stock market, they would have missed out on some great returns over the past 12 months given that the All Ordinaries Index has risen over 25 per cent since 1 January 2019.

When it comes to the stock market, we know that the best course of action is to never follow the herd, and right now, I can confirm that the market is bullish and that you should stay with it. I also believe that the market will remain bullish for the foreseeable future as it continues to rise over the next two to three weeks with the next peak likely to occur at around 7,200 points or above.

I am also confident that the market will rise during the first half of this calendar year with my target set at around 7,600 points. Anyone willing to put in a bit of effort will find some very good opportunities to buy and so take advantage of the strong market conditions. 

Let’s get into this week’s stocks of interest. Watch the video to find out more.

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.