After a decade or so of weaker performance than many major markets, Australia's share market may finally be throwing off its mantle as a global laggard.
At least, that's the view of some observers, after the recent strong run up in the share of Australia's traditional powerhouses – banks and miners.
The ASX200 has under-performed the S&P 500 over the last decade and over five years.Credit:Angus Mordant
In recent weeks, the S&P/ASX 200 Index has been eclipsing fresh 11-year highs and edging closer to a new record. That's good news for investors but it's also a reminder that our stock market has been softer than some of its global peers over the past decade.
Not including dividends, the S&P/ASX 200 is up about 23 per cent in the past five years, which is about half the gain in Wall Street's S&P 500 Index over the same period.
Over a decade, the difference is even more stark, with our market up about 70 per cent, compared with Wall Street's gain of more than 200 per cent (admittedly, the US market had fallen further in the Global Financial Crisis).
Happily for local investors, recently there have been potential signs that the tables may be turning, with our sharemarket outperforming Wall Street over the past three months.
So, could the period of Aussie underperformance be coming to an end?
First, it's worth first looking at why Australian shares have outperformed global peers lately (and lagged the US over the past decade).
A key underlying reason is that our share market is more reliant on miners and banks than most.
The materials index makes up about 19 per cent of the S&P/ASX 200, while financials make up more than 30 per cent.
Wall Street, in contrast, has a much higher weighting to technology stocks, including the FAANGs – Facebook, Amazon, Apple, Netflix and Google – which have enjoyed a stellar run, until recently.
FAANG multiples are compressing at the same time as some of the old economic Australian stocks are doing pretty well
Tech stocks make up about 21.5 per cent of the S&P 500 Index, compared with the S&P/ASX 200 weighting to tech stocks of about 2.2 per cent.
Hugh Dive, chief investment officer at Atlas Funds Management, points out that in the environment of very low bond yields, some old-fashioned stocks that pay a high yield — such as banks and miners — have started to look attractive to global investors.
They have been less inclined to pay high prices for the trendy FAANGs.
"Their [the FAANGs'] multiples are compressing at the same time as some of the old economic Australian stocks are doing pretty well," Dive says.
Shane Oliver, chief economist at AMP Capital, also highlights that the likes of BHP Billiton and Rio Tinto have enjoyed the benefits of a recent surge in iron ore prices.
Banks, meanwhile, are up about 10 per cent in recent months, since the Federal election killed off fears of tougher tax rules for property investment.
Dr Oliver also suggests there are underlying reasons why Australia might continue to perform better than its peers in a world of low interest rates.
He says the average dividend yield on Aussie stocks is 4.5 per cent, compared with about 2 per cent globally.
"When global shares come under some pressure, investors tend to favour assets which might be seen as somewhat safe," he says.
"There's a higher proportion of higher-yielding stocks in our share market. They tend to attract high inflows."
If global interest rates are indeed lower for longer, that could continue to bode well for the share prices of high-yielding businesses like banks.
PM Capital portfolio manager Uday Chreuvu points out that the performance of Australia's All Ordinaries Index has been "almost identical" to the US market over the past 20 years, and the last five years have been influenced by different economic conditions.
"The US had had tailwinds in the past five years and Australia has had headwinds," he says.
In any case, these long-term trends highlight the benefit of having a decent exposure to both overseas and domestic markets.
Fortunately, most of us should be getting this through our superannuation funds.
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