With the new financial year underway, Australian investors are wondering whether now is the right time to buy ASX shares.
It was a great year for global stock markets, especially in the technology sector, driven by the race to develop artificial intelligence (AI).
Investors can gain exposure to ASX and international shares through two highly diversified exchange-traded funds (ETFs). The first is the iShares Global 100 ETF (ASX: IOO) for exposure to international stocks, and the second is the Vanguard Australian Shares Index ETF (ASX: VAS).
The question remains: Is now the right time to buy, or should you hold off? Here's what the experts think.
Lazard's insights: a compass for investors
Lazard Asset Management's midyear commentary is a gold mine of investment wisdom.
In what is sound advice, chief strategist Richard Temple recommends investors maintain a long-term perspective when buying ASX shares despite potential short-term volatility.
Specifically, Temple highlights the technology sector's resilience and growth potential, which are driven by large tailwinds from AI.
However, Temple also cautions that the AI industry's rapid growth may not be sustained without producing strong returns on investment.
In my view, the tech-AI juggernaut can only be sustained if the customers buying these goods and services realise a return on investment.
Put simply, CEOs and CFOs of large companies will not just continue to pour money into AI investments if there is no evidence that the capital deployment is paying off.
Lazard further suggests that, while the U.S. markets might face limited upside due to high valuation levels, international and Australian markets – where IOO and VAS are significant players – could see more robust growth.
Non-US markets are trading on much less demanding valuation multiples and are likely to benefit from accelerating growth while US growth decelerates. Moreover, non-US companies typically are more exposed to floating-rate debt, which should benefit them disproportionately as the ECB and other non-US central banks ease before the Fed.
Performance highlights of ASX and global shares
After a challenging start, the year turned out to be excellent for purchasing ASX shares. This trend was also observed with their global counterparts, especially in the US.
The performance of the IOO and VAS ETFs highlights this. Below, you can see each's performance, including a brief explanation of each fund's advantage. (Keep in mind this is not an endorsement for these ETFs, or to buy any ASX shares in them):
- iShares Global 100 ETF:
- Diversification: IOO offers exposure to top global companies, ensuring participation in global growth dynamics beyond the Australian market.
- Tech-Heavy Portfolio: With significant stakes in technology, IOO could be positioned to benefit from tech sector growth, which is especially pertinent as digital transformation accelerates.
- Vanguard Australian Shares Index ETF:
- Broad Exposure: VAS tracks the S&P/ASX 300 Index (ASX: XKO), offering a comprehensive slice of the Australian market.
- FY24 Performance: VAS reported a solid 7.4% capital growth and a 3.9% distribution return, culminating in a total return of 11.3% for the year, excluding franking credits.
Investing in ETFs like IOO and VAS lets you buy ASX shares in one portfolio. For IOO, the tech-heavy focus is a double-edged sword; rapid growth potential exists, but so does volatility in market downturns.
Meanwhile, VAS provides a stable reflection of the Australian economy, which is valuable for those seeking domestic exposure. However, it's important to note that the ASX indices are heavily weighted to resources/mining and banking.
Lazard's final thoughts: buy now or wait?
According to Lazard's market commentary, investors should brace for continued volatility and recognise long-term growth opportunities.
The emphasis is on staying invested rather than trying to buy ASX shares and time the market, a strategy that aligns with the historical performance of ETFs like IOO and VAS. This also avoids tax issues with rapidly buying and selling ASX shares.
Strategist Temple says that the market's view is "shifting to lower short-term interest rates and reduced earnings on cash" and that many investors are hesitant to buy riskier assets "at or near record-high market levels".
My view is that the best approach is to allocate capital away from cash to riskier assets while identifying those "risky" assets that are less correlated to the most expensive parts of the global equity market (e.g., tech and AI leaders) and instead invest in areas of the market that have more unrecognised upside going forward.
Buy ASX shares for the long-term
The decision to buy ASX shares now or later ultimately hinges on your risk tolerance, investment horizon, and financial goals. ETFs like IOO and VAS could offer robust pathways to growth, albeit with inherent market risks.
Regardless, considering a long-term investment approach is key if you're inclined towards long-term gains. As such, Temple says market timing is less important.
Overall, the lesson of history is that owning equities over time is among the best investment options, but it is important to be fully invested through the cycle and to not try to time the markets. In fact, one recent analysis indicated that over the 20 years from 2003 to 2022, investors who missed the 10 strongest up-days in the US equity market forfeited over half of the total return from the entire investment period.
As always, remember your own personal risk tolerances and consult professional advice when necessary.
