Australian sharemarket: Boom or bust?

The direction for the Australian sharemarket in 2015 depends on the same two factors that it will always depend on: the first is earnings and the second is the price investors are willing to pay for those earnings.

Earnings are dependent on economic growth, which is slowing dramatically thanks to China's artificially fuelled infrastructure growth coming to an end.

Earnings are also driven by profit margins and for many sectors any recent expansion has been due to cost cutting.

Margin pressure may now emerge from a lower Australian dollar, higher wage costs and deflation prompted by online competitors.

The other driver of the sharemarket is the multiple of earnings investors are willing to pay for those earnings.

The single biggest driver of this is interest rates.

Low interest rates have driven baby boomers out of the abysmal returns in cash and term deposits, forcing them into a narrower and narrower band of quality companies with stable dividends.

When these prices expand (as they are likely) to such a point that the yields are too low to compensate for the risk of a bump to the underlying company's earnings, or an eventual increase in interest rates, the rally will end and investors will momentarily believe share prices have reached a new and safe plateau.

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