Stock market bubble fears overblown: Vanguard

With the ASX 200 just a couple of hundred points behind its record high set last year and the US market surpassing its pre-pandemic highs, Vanguard’s senior economist Alexis Gray believes the 10-year projection for domestic and international equities has improved in 2021, compared with last year’s figures.

“Despite the pandemic, the downturn and the recovery, we actually see valuations are somewhat fair and there’s an improved outlook for equities.

“And therefore this concern about a bubble, in our view, is overdone,” she said.

APAC chief economist Qian Wang also believes valuations are still “fairly valued” despite COVID-19 continuing to impact world markets.

“One thing across the world is the equity market has rebounded quite notably last year, despite all the uncertainty associated with the virus and the incomplete economic recovery,” Ms Wang said.

“However, because interest rate and inflation have also become much lower, we find that equity values, despite expanding, are actually still reasonable.”

Chinese market fears are also overblown

Vanguard also believes the much publicised political strain between Australia and China is unlikely to have a meaningful impact on Australia’s economic outlook in 2021.

“I think unfortunately last year the relationship between the two countries deteriorated somewhat… But overall the size of the tariffs and the size of the goods market is overall not that large – around 1 per cent of GDP, possibly even less, is the overall damage from the imposition of those tariffs,” said Ms Gray.

“We would need to see more tariffs to start to hurt – for example, if China were to put tariffs on the larger exports like coal and iron ore. The tricky thing is it’s hard for China to substitute for ways to purchase iron ore, because there aren’t many producers in the world that can meet China’s demand.”

China could find other ways to penalise Australia, but Ms Gray believes that there is currently a desire to come to an agreement and reconcile, saying: “The tone has shifted in recent weeks.”

However, the US-China relationship will remain contentious in the future and is “definitely less favourable” than in the past, said APAC chief economist Qian Wang.

“US-China relations will probably get better compared to the last four years, when you think about the new US president Biden – he’ll take a more balanced approach to competition and collaboration… but frankly speaking, the game is still on,” Ms Wang said.

“The US-China tension is a long-term game in nature, given the fundamental discrepancies between the two countries on many critical issues… a multilateral approach means the US will work with its allies to contain China, and the focus will shift away from trade to other structural issues such as market access, technology, geopolitics and human rights.”

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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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