Australian shares are likely to miss out on the full impacts of the optimistic upswing in equity markets that has driven US, Japanese and German stocks to record highs, with investors instead focused on China's congress this week and the possibility it will pull back on the country's economic stimulus.
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The bank and resource-heavy composition of the ASX leaves few Australian companies exposed to the bullish sentiment that has gripped global equities with the market largely tied to Chinese developments.
"We might get a taste of the global optimism, a small push higher," said Garry Laurence, global portfolio manager at Perpetual Investments.
"But global investors are probably going to look elsewhere in the region to ride the global wave. Instead, commodity prices and Chinese economic data will be the primary driver of any meaningful movement in local shares."
The Communist Party's 19th National Congress begins on October 18. At it President Xi Jinping is expected to lay out new policy initiatives and consolidate his power for a second five-year term. Analysts at RBC Capital Markets said "specific economic policies won't be laid out at this meeting, but official statements and who ascends to power will set the tone for the third Plenary Session ... in March 2018, which will give more specifics about China's economic agenda for the next five years".
China's build-up of credit has been an issue in recent years - S&P Global Ratings cut China's credit rating. But the ratings agency offered a get-out clause, saying it could "raise ratings on China if credit growth slows significantly and is sustained well below current rates while maintaining real GDP growth at healthy levels".
But if the People's Bank of China and the Chinese government pull back on their stimulus plans after the Congress and become more hawkish, it could affect global commodity prices, which would influence Australian shares directly.
"The industrial commodities are already beginning to roll over, so if they do indeed pull back on their stimulative efforts, it could have an impact on the 'reflation' trade everybody is talking about right now," said Matt Maley, equity strategist at Miller Tabak.
Iron ore prices have enjoyed healthy buying support in recent weeks and data shows Chinese iron ore imports for the month of September hit 103 million tonnes.
Corporate woes
But despite the ASX enjoying a 1.8 per cent rally, its best week in percentage terms since the last week of March, investors are still trapped in the tight trading band that has listlessly meandered along since its peak in April.
"Any economic growth in Australia isn't really flowing through to corporate profits which is keeping the broader market within this range," said Matthew Sherwood, head of investment strategy at Perpetual Investments.
"Corporate Australia has struggled to grow earnings above nominal GDP, so the best thing we can say is it's not getting any worse."
But other developed markets around the world are enjoying the fruits of a recovering global economy. According to Bloomberg research, the dollar-denominated capitalisation of worldwide shares appreciated in 2017 by $US25 trillion.
US shares hit record highs last week following solid retail sales data, boosting the S&P 500 up about 14 per cent so far this year.
German manufacturing strength is underpinning the DAX's recent tear, which hit a record high on Friday.
And Japanese shares hit a 10-year high last week, as investors ride the wave of US optimism.
"We might get pulled up for a short period by other markets," said Mr Sherwood.
"But the lack of diversity in the ASX will keep a lid on any proper momentum."
