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Australian Share Returns Vs. Global Share Returns

Anyone with any sort of global share exposure in their investment portfolio over the past several years would be pretty happy with the results. On the back of quantitative easing programs, where the Federal Reserve pumped more than US$3.7 trillion into the US economy between 2008 and 2014 (essentially buying bonds using printed money), along with zero interest rates, tax reform promises by Trump and low unemployment, we’ve seen the US economy grow and the sharemarket perform similarly.  The Dow Jones Industrial Average set its highest closing record of 23,557.23 last week – up 250% (!!!) since the depths of the GFC in 2009.

The US economy is looking so good in fact that the Fed will now begin its quantitative tightening program (by slowing reinvestment in maturing bonds) as well as gradually lifting interest rates, with the general consensus citing December as the starting point.

Eurozone data is likewise looking good with unemployment declining and economic growth heading higher ( in fact, growth in the Eurozone has outpaced the US).  Japanese and Chinese growth has stabilised and emerging markets are doing a lot better – so world conditions are looking a lot healthier.

So what is up with Australia?

Our market has underperformed the US since the GFC in 2008.  In actual fact, it has underperformed most other major equity markets.  Reasons for this?

  1. The Australian stock market is particularly concentrated with just 10 stocks accounting for more than 50% of its total capitalisation.  In fact, just over 50% of the All Ords Index is made up of financials and materials.  Information technology comprises about 23% of the S&P 500 (including  FANG stocks like Facebook, Apple, Netflix and Google) and has helped drive markets up.  Australia has a significant lack of IT stocks, comprising only 1.3% of the local market  – which essentially means we are well behind the eight ball.
  2. The Aussie dollar decline from over US$1 to current levels around US$0.76 (widely tipped to fall further) has reduced the attractiveness of local stocks to overseas investors – why would foreign investors come here when they can get better returns at home?
  3. Lower commodity prices beyond our resources boom
  4. Inflated housing markets are also impacting our stock market.  While loans for shares have shrunk significantly since 2007, loans for housing have doubled over the same period.

Whilst our economy avoided recession over the subsequent years without having to slash our cash rates to zero, it simply hasn’t been enough to lift our economic growth.  The gap is expected to widen between Australia and the global recovery going forward largely due to pressure on household incomes (from lack of wage growth).

It’s not all doom and gloom though with the ASX 200 breaking through 6,000 points a week ago, and some economists forecasting 6,400 by the end of 2018.

Australian stocks offer income opportunities given dividend yields and franking credits, but for investors seeking growth, global stocks may be the ticket.  As Escala Partners chief investment officer Giselle Roux has said “buy Australia for income and overseas for growth”.

Given that on an actual global weighting, Australia makes up around only 2% o f the world share market capitalisation, there are significantly better growth prospects globally, albeit diversified.


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