Opinion – Market’s fate tied to tech, resources


By David Bassanese

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Australian equities have tended to underperform the global benchmark in recent years, which again highlights the importance of seeking some global diversification within investment portfolios.

That said, the degree of local underperformance does vary somewhat depending on how returns are measured.

On a pure price basis (ie before dividends), the S&P/ASX 200 Index has produced annualised gains of only 4.3 per cent a year from the end of 2012 to the end of September this year, compared with 10.1 per cent a year for the MSCI All-Country World Index on a local currency basis. This is typically the most obvious and popular way to compare returns.

However, we also need to allow for the fact that Australian companies pay higher dividends, which also have added tax advantages due to franking credits. Allowing for both, the grossed-up total return on Australian shares is 10.1 per cent a year compared to 12.3 per cent for the global benchmark.

Another complicating factor is the exchange rate. Over this period, for example, the Australian dollar fell from US$1.03 to US78c. Accordingly, in Australian dollar terms, the MSCI All-Country Index has delivered stronger total return gains over this period of 16.6 per cent per a year.

What drives Australian relative performance over time? Two distinguishing characteristics of the Australian market appear to be largely responsible.

First and foremost is the market’s relatively large exposure to mining companies, and hence sensitivity to the price of Australian exports (ie commodity prices). The Australian market’s relative performance has tended to broadly track the terms of trade, or the price of Australian exports relative to imports.

Over much of the 1970s and ‘80s relative performance was fairly stable, after we enjoyed a relative performance roller coaster due to the mining boom and bust.

There have also been two periods when Australia experienced a strong spurt of outperformance due to a speculative surge in mining sector prices, even though commodity prices ended up not moving all that much at all.

A second factor that appears to help explain Australian relative performance is the popularity of the global technology sector, especially given Australia’s relatively low weight to this sector. Australia also tended to underperform in the late ‘90s even though the terms of trade were broadly stable, which coincided with the strong price performance of the global technology sector.

The Australian market then unwound this underperformance as global tech stocks subsequently declined.

Where to from here? Sadly, for our market, if you expect commodity prices to continue to edge down rather than up and for the global tech sector to continue to outperform, then it would suggest the Australian market is also likely to underperform relative to global stock markets for the time being, other factors such as currency exchange rates being equal.

David Bassanese is chief economist at BetaShares

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