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Why have Australian stocks outperformed our global peers?

David Bassanese
July 10, 2018

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As is often the case, a look back at financial market performance can throw up a few surprises. And given Australia’s generally sluggish economy and the intense global focus on the power house United States economy in recent times, it may surprise some investors to know the overall stock market did not do too badly last financial year.

In fact, our often-maligned large cap stocks - as covered by the S&P/ASX 200 Index - returned a respectable 13% over the past financial year. Our market even outperformed many of our global peers, with the S&P Global 1200 Index returning 11.5%.

As you’ll see, this result is a testament to the increasingly diversified range of success stories across our economy, partly due to our maturing relationship with China. 

For starters, note our market held its own even though the global technology sector went on another tear, with the S&P Global technology sector returning 27% over the year.  Technology accounts for around 15% of global stock market capitalisation overall, but only a paltry 1.4% in Australia. So while our technology sector did even better than global peers (returning an impressive 32%), our lack of exposure to this booming sector handicapped our performance. 

But even in this albeit tiny sector of the stock market, there are some shining successes with WiseTech Global, Xero, NextDC, REA Group and CarSales.com all producing strong returns last financial year. 

Along with our underweight technology, also hurting relative performance last financial year was the financial sector.  Our market just so happens to be overweight one of the sectors that underperformed globally last year, with the global financials returning 5.4%.  Our market has a 35% weight to financials, compared to only 17% globally.  Adding insult to injury, our financial sector even underperformed global peers, returning only 1.6% as slowing credit growth and shocking revelations stemming from the Banking Royal Commission weighted on investment sentiment.

Using an analysis called “shift-share” to compare our performance to that of the world, we can say that our underweight to the strongly performing technology sector and over weight to the weaker performing financial sector created a negative “industry mix effect”.  

So far, so bad.  So how did we manage to punch out a world beating return?

We can put this down to the fact that several other sectors managed to produce much stronger returns than their global peers.  Again in the shift-share jargon, we enjoyed a positive “industry competitiveness” effect.

For example, our energy sector surged forward, returning 42%, compared to only a 7% return globally. Ditto our materials sector (including our major miners), which returned 30%, or almost twice the 16% return from the global materials sector. This outperformance across the resources sector appears to reflect our exposure to commodity and energy producers in particular, which have benefitted from strong coal and oil prices especially.

But two other standout sectors are far removed from mines, oil and gas wells.  The consumer staples sector also returned a whopping 30% last year, far outstripping the global return index which declined by 1%.  And for this we can probably thank China’s broadening interest in our non-mining products, such as processed food, health and beauty products.  A2 Milk, Bellamy’s, Costa Group and Blackmores all chalked up very strong returns of between 50% to almost 200%.

The other standout sector was health care, which returned 28%, and again outstripped the global health care benchmark which only returned 6%.  And here we can cite the usual suspects as star healthcare performers, including CSL, Resmed and Cochlear. Our leading health care companies retain strong market positions in booming markets around the world and the local value of the offshore earnings have also been helped weakening trend in the Aussie dollar.

On a less positive note, our telecommunications sector did drag the chain, dropping 30% (thanks Telstra!) compared to only a 3% drop among global telecommunications companies.

Overall, however, it should be apparent that while financials – and to a lesser extent resources - continue to dominate our share market, we’ve enjoy a range of success stories in other areas such as technology, health and consumer goods. It’s just a shame the latter don’t play as big a role in our overall market!

 

Published: Wednesday, July 11, 2018


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