ASX hits record high as economy rebounds

By Craig Turnbull, Active Super Chief Investment Officer
June 2021

As the 2020-21 financial year draws to a close, we have seen the economy grow to be even larger than it was last year and observed the stock market bounce back to hit record highs.

The S&P/ASX 200 has performed strongly, gaining 4 percent in the past month. It is currently trading around an all-time high of 7360 points after bottoming out in February 2020 at 4546 points – representing a 62 percent gain – leading to better superannuation returns for members.

The strength of the stock market is being supported by the recovery in the domestic economy as the March quarter national accounts data show that the size of the overall economy is now the biggest it has ever been, despite some industries such as tourism and hospitality facing challenges. 

Australia's economy bounced back from the COVID recession, growing by a much-better-than-expected 1.8 per cent in the March quarter for an annual rate of 1.1 per cent.

The gross domestic product figures show Australia's recovery is becoming more broad-based due to a combination of business-driven private investment and household consumption, rather than being propelled by government stimulus.

However, economists agree that COVID-19, a slow vaccine rollout and closed international borders all remain as potential threats to the economic recovery.

As expected, the Reserve Bank did not move on interest rates and held the cash rate target at a record low 0.1 percent. However, it did highlight the greater role investors are now playing in the booming property market.

House Price Surge

Housing values have surged to record highs in Sydney, with more growth expected in coming months as strong demand from buyers amid limited supply is putting upward pressure on prices. Dwelling prices across Australia’s capital cities rose 2.3 percent in May – the second-fastest growth rate since the 1980s, according to CoreLogic analysis.

In Sydney, house prices rose 3.5 percent in May to be 11 percent up over the quarter. More broadly, the value of dwellings across regional NSW gained 2.5 percent in May and have jumped 18.6 percent in the past 12 months.

CoreLogic said the combination of improving economic conditions and low interest rates was underpinning consumer confidence which led to “persistently strong demand for housing”. Strong levels of consumer confidence, along with greater housing and building activity, can lead to increased spending across many sectors of the economy. This has the benefit of assisting the bottom line of corporates, and in turn, super funds. 

The RBA also upgraded its assessment of the labour market, noting that the jobless rate is falling faster than expected and is tipped to drop to around 5 percent by the end of the year. In April, the unemployment rate fell to 5.5 percent from 5.7 percent, but it only declined because the number of people looking for work dropped significantly, albeit from a record high.

Otherwise, the central bank maintains that interest rates are unlikely to rise before 2024. It believes that the conditions necessary for a rate rise are inflation “sustainably within the 2 to 3 per cent target range”, and a labour market that is “tight enough to generate wages growth that is materially higher than it is currently”.