Investors have been reaping the benefits of a bull run on the Australian Securities Exchange, but a correction is looming and they should take heed, said analysts.
The index crossed the psychological 4,900 mark on Wednesday, highs not seen in 21 months, riding off the back of this year's broad-based rally in global markets.
But David Lennox, resource analyst at Sydney-based stock market research house Fat Prophets, warned investors to take a cautious approach. In his view the ASX 200 is set to correct by up to 5 percent over the next three months.
"We have had a good run on the back of improved sentiment in the overall global economy, especially within China and the U.S., where the market has gained confidence. But the rally is not endless, we have had a decent run and sooner or later the markets will realize that all the things we thought were rectified - are not," said Lennox.
Latest Chinese government figures showed growth picked up to 7.9 percent in the final three months of 2012, from 7.4 percent in the previous quarter. However, concerns over a bubble in the region's property market persist.
The U.S. economy has also rebounded in the fourth quarter to 3 percent, an improvement on 1.8 percent in the previous quarter, but investors are wary of how its government will tackle cutting its huge deficit and simultaneously stimulating growth.
Any changes to the outlook for China or the U.S., according to Fat Prophets' Lennox, could quickly turn sentiment around. The situation in the U.S. is a crucial risk, where a lack of resolution on budget cuts could push the world's largest economy into a recession.
"The U.S. will have to reign in government sector spending or it would go into deeper debt. We will be watching closely which programs are to be cut and what impact on private sector. These are the two key factors," said Lennox.