Australian Stock Market to Trade Higher in 2020

While the Australian stock market traded lower last week with the pullback on the Financial and Materials sectors, it is showing strong signs it will trade higher in 2020.

The Financial and Materials sectors account for around half of Australia’s market capitalization; therefore, we can expect these sectors to influence the direction of the market when both of them are rising or falling. Given that both sectors were down last week with Westpac and ANZ from the Financial sector falling heavily and RIO, S32 and BHP, from the Materials sector also falling away, it is not surprising to see the market is down. So what caused the sectors to fall away?

NAB, Westpac, ANZ and Macquarie all traded ex-dividend last week, so it’s not out of the ordinary to see them pull back. Remember, when stocks pay dividends, the share price will often fall equivalent to the amount of the dividend. The half year dividend yield for NAB, Westpac and ANZ was around 3 per cent while Macquarie’s dividend yield was around 2 per cent.

Looking at the Materials sector, the price of iron ore has fallen on weak figures out of China for their iron ore imports. With lower quality iron ore, FMG has fallen the hardest, which was down over 10 per cent at one stage during the week. RIO was also down over 4 per cent, while BHP was down around 3 per cent for the week. That said, all have started to bounce back to finish the week in a much better position.

So, should we be worried about the Financial and Materials sectors? Despite the short term weakness in each sector right now, over the medium to longer term both sectors are looking good, with each likely to provide some great opportunities in 2020.

Top and bottom performing sectors last week

Information Technology was the top performer again up over 4 per cent, while Healthcare continued to perform well, up around 3 per cent with Consumer Staples not far behind. While Materials was one of the best sectors the prior week, it was near the bottom last week together with Financials, which were both down over 1 per cent so far for the week. Utilities and Energy were also in the red but only slightly.

Looking at the top 100 stocks, CSL was, once again, a top performer up over 3 per cent, while Pendal Group continued its rise, up 3 per cent last week and over 13 percent for the month. Bluescope, Coca-Cola, Xero, Janus Henderson and Woolworths also did well, as they were all up over 2.5 per cent for the week.

The worst performers were QBE down around 3 per cent, while NAB and Bank of Queensland were down around 2 percent. These were followed by Aristocrat, Medibank, Challenger, Worley, S32 and Suncorp, all currently down around 1.5 per cent for the week.

What’s next for the Australian stock market?

I have to say that I feel like a broke record given that, once again, the market displayed indecision last week, as it is currently trading around similar levels to where it was two months ago.

To give you some idea of what has unfolded, over the last 30 days the market has closed higher on 18 days and lower on 12 days. If the market were bullish, however, you would normally see it close higher for around 24 days in a 30 day period. So while we know it is not bullish, it is also not bearish given that price is not falling away but instead holding at current levels.

As I have said in the past, it is important for investors to be patient right now as the market will decide on a direction very soon. Remember, it’s important to focus on the medium to longer term view rather than the short term.

For the market to confirm it is bullish in the medium term, we need to see it rise above 6,900 points. If this occurs, I believe it will provide the leverage for the market to trade through the previous all-time high of 6,958 points that occurred in July of this year.

That said, if the market does fall, I am very confident it will be short and sharp, and nothing to be concerned about as the signs are strong that the market will trade higher over the coming months into 2020.

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 book stores and online.