On 1^st March the All Ordinaries Index of Australian share prices closed at a record high, above 8,000 points for the first time. That was a gain of around fourteen per cent over the last three months, though only eight per cent over the last year. Should we go defensive now?

Share price records are not rare and abnormal. They reflect a growing economy. As production increases, incomes rise. Higher incomes and a growing population lead to more sales for businesses and increasing company profits. Higher profits translate into higher share prices.

The recent gains have been driven by interest rates reaching their peak in the US, Europe and Australia. Rate cuts are now likely in the US and Europe by mid-year, and here by year end. Economies are slowing, bringing inflation down, but not collapsing, so a “soft landing” is likely.

Can share price gains continue? Some caution is likely at this level with investors awaiting further developments. Large company shares have done much better than small companies over the last two years. The ASX 50 earned 10.1 per cent including dividends, while the Small Ordinaries lost 0.4 per cent.

After a weak period in share markets large company shares usually recover first. Small companies follow. When investors think large company shares are fully priced they start seeking value among the less-studied small companies.

Analysts have recently been questioning the price of major companies like Commonwealth Bank. It is also much easier for small companies to grow by increasing their market share than it is for large companies. So further gains this year are more likely among small companies.

This is probably a good time not to have all eggs in one basket, to diversify. While shares in Australia and overseas have had a good run there are other attractive options. Commercial property has been disrupted and depressed due to working-from-home, and rapidly rising interest rates.

Exposure to property should provide benefits. Infrastructure investments performed poorly when interest rates rose and should improve now. Including a portion of fixed interest and cash is also more appealing now that interest rates are higher. Diversification will reduce volatility.  

There may well be some sort of correction in the share market this year before further gains when the first-rate cuts appear. Fortunately, the economy is still sound. Lower borrowing costs ahead will help consumers and businesses.

There is also still a big weight of money flowing into super funds that must be invested somewhere. That will continue to provide demand for shares and support prices.