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Australian share market

Why is our market underperforming the US?

Glenn Fairbairn
Director/Private Client Adviser
29 Mar 2012

The Dow Jones Industrial Average has risen in excess of 100% since its low point in March 2009, whilst over a similar period the ASX 200 has risen, only 37%. In addition, since the beginning of this year the Dow Jones is up around 8% whilst our market is up around 6%.

So why does it appear that we are lagging behind the US?

There are a number of factors that may have contributed to this underperformance:

Longer term outperformance

Leading up to the GFC, the Australian market significantly outperformed the US. From March 2003 to October 2007 the ASX 200 increased by 145% whilst over the same period the Dow Jones increased by 82%.  Given that both markets fell roughly the same amount from top to bottom (around 53%) it is probably not that surprising that the US is playing some catch up.

A reliance on financials and mining stocks

The Australian market is heavily weighted to resources and financials and the performance of these two sectors has a significant impact on the index.

Considering that China is a major consumer of our resources, any negative news regarding the performance of their economy will directly impact the performance of mining stocks. China’s economic growth has slowed markedly over the past 12-18 months and its GDP growth target was recently cut for the first time in eight years this year, from 8% to 7.5%. Many international investors are not optimistic over the sustainability of the ‘commodity boom’, with predictions that commodity prices will fall. All of this has not been positive for the resource sector in the immediate term.

In banking, offshore investors have been worried about the Australian housing market and hypothesise that our market is headed for the same downturn experienced in the US and UK. Investors are therefore mindful as to how a potential slowdown in housing could impact bank profitability.

The US market has a heavier weighting to Information Technology and Health Care which had been more solid performers of late.

Strong dollar

The strong Australian dollar has made the Australian sharemarket relatively less attractive to global investors. If a foreign investor’s view on the Australian dollar is that it is at the top end of its historical valuation, then buying Australian company shares could expose them to significant currency risk and be a major lag on performance.

Weak earnings

Whilst dividend yields are relatively strong, the earnings growth for Australian companies is fairly benign. The February profit reporting season saw earnings forecasts downgraded modestly. Comparatively, the US experienced earnings growth of 10% in the previous calendar year.

Political uncertainty

The uncertainty surrounding government policy is also a major concern for foreign investors. A minority government and ongoing debate surrounding both the carbon and mining tax, has added further uncertainty with regard to the Australian economy and many foreign investors are simply choosing to invest elsewhere.


Australia’s productively growth i.e. the measure of what a nation achieves in outputs compared to inputs significantly lags our foreign peers, in particular the US. Many have argued that this has been due to the lack of new productivity and industrial relation reforms. The OECD actually singled out Australia as one of four countries to experience a ‘particularly strong deceleration in labour productivity growth’.

Australian labour productivity is currently around 84% of that in the US. This compares to around 92% in 2000. The bottom line is we need to lift our game.

Overall, whilst this occurrence is disappointing and downright frustrating, it is important to bear in mind that most of the above are short term issues. The Australian share market still represents good long term value. As global confidence recovers and the fears of a hard landing in China hopefully abate, our markets will hopefully provide some reward to investors.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.