US influence on Aussie market waning. For how long?
Recently the media cottoned onto the fact that the Australian stock market, as measured by the major indices, has not kept pace with the US market, which is now hitting all time highs (on a total return basis). You can see from Chart 1 that the US market is most certainly outperforming the Aussie market and it seems all the ‘Go Australia’ cries are falling on deaf ears. Indeed, Australia really needs to be shouting ‘Go China’ but more on that in a minute. Since June 2011 the US market has been pulling away. The reports did not go on to explain the reason for the divergence however we have previously explained that with credit growth virtually non existent the banks would not be able to justify sustained substantial gains and with our thesis on iron ore calling for much lower prices, we couldn’t see how the big material stocks were going to rise. Combined the banks and materials stocks account for a significant portion of the index weighting and without those sectors running, there is no way the All Ords can. We also think China has a little to do with it all.
Chart 1
Take a look at Chart 2, which plots the Aussie market against the Chinese Shanghai index. Since about the same time last year, the Chinese market has been falling and given that are large part of our economy is tied to the fortunes of China, it makes sense that the prices of those companies with direct (and indirect through consumer sentiment) exposure and a significant weighting to the index locally, would have an adverse influence on the Australian market.
What is also clear is that our strong Australian dollar is not reflecting foreign demand for our shares. And what does that tell you?
Chart 2
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Simon Stewart
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Hi Roger,
In your opinion do you think the RBA is keeping Aussie interest rates artificially high? The way we calculate the inflation rate bothers me. With the large rise in electricity and water rates across Australia, mostly as a result of state government decisions, this tends to push up the inflation rate. It is hardly a reflection of a strong economy and over exuburant consumer spending. So what if the oil and gas, and mining industries are borrowing big to expand operations, doesn’t mean the average Joe has a fist full of cash. If you want people to stop paying down debt and get money circulating back in the economy drop the rates and please only include discretionary consumer items in the inflation rate calculation as a true indicator of whether the economy is overheated.
Sorry if this is an over simplistic view
Simon
Roger Montgomery
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I had coffee on Monday with Hans Kunnan (the economist) and he and I have been emailing each other about the CPI calc since then. For transparency I should say I am not a believr in the calculation despite the ABS’s best efforts to make it reflective of real life. I don’t think its in Australia’s interest to keep rates high so no I don’t believe the rate is being kept artificially high. The issue with rates is that below a certain level changes are inelastic. You aren’t going to get a big surge in borrowing when rates fall from 3% to 2.5%.
Stephen Royle
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I’m thinking that the interest rates have an influence. The US is close to zero so US investors are inclined to invest in equities rather than property or cash. Ausie’s still have a choice of property, cash and equities. It will be interesting to see what happens if our interest rates decrease.
Roger Montgomery
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Good point Stephen. Thank you.
garry howlett
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Today Lombard Street research have come out with their independant figures on Chinas GDP, using the figures put forward from the Chinese govt, they believe that growth is running at closer to 5% and has been since Q4 2011..And not what has been quoted from the Chinese govt and other analyst, hence already in a so called hard landing. Its no wonder the shanghai stock market is underperforming.
From the recent posts here, there may also be a feeling that stated Chinese growth figures maybe just a little cooked.
With most analysts still having higher chinese growth in their valuations (iron ore prices in particular), I think the AUS mkt may struggle in the medium term future to be trading where it is now. So the divergence in U.S/AUS mkts could escalate in coming months.
Roger Montgomery
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Thanks Garry. ANd what happens to the GDP numbers if you remove artificiality around the constructions of cities that nobody lives in?
Craig Budrodeen
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I actually shifted 75% of my superannuation portfolio into “International Shares” 18 months ago (anticipation of an OS outperformance of the ASX and the fact I have enough exposure to the ASX via private investment). Other 25% cash.
Imagine my disappointment when I got my statement the other day showing a 4%+ FALL over the past 12 months in the OS component. That disappointment is franked when I look at the charts.
Am sick to death of underperformance by fund managers. Note to self – SMFS and stay away from retail funds!
Roger Montgomery
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Hi Craig,
Who’d you go with on the OS shares Craig? Some funds have returned more than 20%.
Craig Budrodeen
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Hi Roger,
I’m with IOOF Multimix and I must apologise and correct my post.
The fund performance since inception has been -5.58%, with an inception date of 30/04/2008 (I really should read the statement more carefully before posting stuff like that).
Last 6 months has been -0.2% which is quite OK by me.
I’m still going SMSF though. Will try and reduce my exposure to Australia by companies deriving profits overseas rather than managed funds.
Craig Cory
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Our Top 20-50 have been doing well, small caps real sad.
pj2105
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Does this mean that our higher Aust dollar is making it not tempting enough for overseas buyers to pick up our shares?
With all this quantitative easing the USA is doing we should be expecting a lot more of the same in the future.
Roger Montgomery
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That would be the conventional view. I wonder.