Global equity markets have risen in 2012, driven by improved momentum in the US economy, resilient data out of China and signs that European leaders are finally stepping up to tackle its sovereign debt and banking crisis. While this has been positive, it has refocused investor attention on the underperformance of the Australian share market compared to international peers in recent years. It is important to consider this in a longer-term context (over 10 years, the Australian share market has been a significant outperformer).
This more recent underperformance has confused investors, especially given Australia is perceived to have a stronger, more resilient economy compared to international peers. Other positives often highlighted include a resilient banking system, a stable AAA sovereign credit rating (one of only nine countries worldwide), links to Asia through the mining boom and the ability of the RBA to ease monetary policy if required.
Composition of the Australian sharemarket
It is sometimes thought that the Australian sharemarket mirrors the composition of the Australian economy. This is not the case. The sharemarket index is dominated by financial companies, including REITs (approx. 40% of the index) and mining companies (25%). This compares to 20% and 10% of the Australian economy respectively. The Australian economy is also made up of many services companies, particularly small businesses which are not listed on the stock exchange.
With over 40% of the Australian share market owned by offshore investors, their views on these important sectors have a large impact on the performance of the overall Australian sharemarket. Offshore investors tend to be more active in their holdings of Australian shares than households and super funds, which together own just under 40% of the market. These domestic investors are traditionally more passive investors and do not frequently change their share holdings. In contrast, when offshore investors begin to get nervous about the global outlook, they generally sell shares across the board, which includes exposure to Australian shares despite the more resilient economic fundamentals.
Global investors often see the Australian mining sector as a direct link to China’s economic growth, which has slowed in 2011 and is expected to continue to slow in 2012. China cut its GDP growth target for the first time in eight years from 8% to 7.5% this year. As a result many international investors are holding a benign view over the sustainability of the ’commodity boom’ with commodity prices expected to fall, just at the same time when miners are significantly expanding capacity. International investors, particularly in the US remain sceptical over the potential growth in China, directly impacting ownership of Australia’s mining sector.
In banking, offshore investors have been worried about the Australian housing market as well as exposure to wholesale bank funding markets. One of the most common questions that offshore investors ask about Australia is the potential for a slowdown in housing and how this would impact on bank profitability. The Australian housing market has remained resilient compared to countries such as the US, UK and Spain, despite similar house price gains and household debt levels.
Indices:
The All Ordinaries Index has moved up over the past week increasing 73 points (or +1.7%) since closing last Friday to 01:35 pm this Friday.
The rest of the world as measured by the MSCI index is down 3 points (or -0.2%) from closing last Friday to end of trade Thursday.
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