To the casual observer, it may appear that all stock indices have been around for the best part of a century. After all, the Wall Street Crash of 1929 is arguably the most recognizable date and event in stock market history, fueling the perception that share prices have been rising and falling for several decades. However, some of the most important indices in 2020 are relative newcomers to the world of finance, including the ASX 200.
On 31 March 2020, the ASX 200 celebrates its 20th birthday, with the index comprised of stocks from 200 major companies listed on the Australian Securities Exchange. The ASX 200 is operated by Standard & Poor’s (S&P), the financial services giant responsible for the S&P 500 in the United States. Just like the S&P 500 is considered the benchmark index for Wall Street, the ASX 200 is the best representation of the health of the Australian economy.
The relationship with other indices
As with all indices, market sentiment is crucial in driving the value of the ASX 200. It is important to monitor that public sentiment when trading in ASX 200 futures, with the IG online trading platform providing up-to-date analysis on whether traders are generally adopting long or short positions on the index. Traders can also compare other accounts’ positions on similar markets, which reveals potential links between the ASX 200 and other key indices like Wall Street and the FTSE 100.
American indices and economic policies are the most influential at shaping other markets. When the US Federal Reserve slashed its benchmark interest rate in mid-March 2020, it was not just US markets that suffered. All Asian Pacific stock indices posted losses, with the biggest coming on the ASX 200. While all traders should keep a keen eye on developments in the US financial system, ASX traders should also observe the Nikkei 225 and the SSE Composite Index, the benchmark indices in Asian Pacific neighbors Japan and China respectively.
The companies to watch
Banks, such as Commonwealth Bank and National Australian Bank, and mining multinationals, such as BHP Group and Rio Tinto, are among the major players on the ASX 200, with their higher market capitalization giving them greater influence on the overall value of the index. Biotech giant CSL and retailer Woolworths also feature among the wealthiest ASX 200 companies.
Different industries may be worth avoiding at different economic flash-points. For example, banks may post significant percentage losses if there are growing fears of a global recession. Mining companies may slump if unable to export their goods at the usual rate, while retailers may struggle if unfavorable foreign exchange rates make importing more costly.
The traders suited to the ASX 200
It is vital that traders only invest in the markets that they know well. A trader with an intuitive understanding of the Australian economy is naturally more suited to investing in the ASX 200. For example, in 2019 the ASX 200 posted some massive daily losses that could have appeared critical to the index and prompted a rash of reactionary selling.
However, someone closely following the Australian economy will have stayed faithful that the ASX 200 would generally trend upwards, which proved to be the case as the ASX 200 posted its best year in a decade. The index consistently demonstrated its resilience in 2019 by posting overall long-term gains after each dramatic short-term loss, so a trader with the patience to ride out these fluctuations would be a good fit for investment on the ASX 200.
While the entire global economy has endured a tough start to 2020, the ASX 200 gave investors plenty of cause for cheer in 2019. Traders looking to diversify their portfolio away from the standard Wall Street markets may find that the ASX 200 has plenty to offer in terms of investment opportunities.
