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Is the golden era for the Australian stock market over?

January 10th, 2009 · Greg Atkinson · 3 Comments

One question that investors need to consider amongst all this market turmoil is; has the dream run of the Australian stock market come to end? Perhaps for example the days of the Australian market (ASX) outperforming the Dow Jones Index are over and we need to be prepared for less glamorous returns? We might even have to put aside our patriotic feelings and look offshore for better returns in the future?

Let’s be honest, the Australian stock market had a very good run from 2003 up to the end of 2007. An enormous amount of wealth was created (and wasted) and even after the 2008 wipe out, many long term investors would still be ahead especially if you factor in dividends. However for U.S. stock market investors over the same period things have not been so good as we can see in the chart below.

All Ords vs Dow Jones 10 Year Chart

all-ords-vs-djia-10-year-chart_0.gif

After looking at the 10 year chart of the All Ordinaries (XAO) versus the Dow Jones Industrial Average (DJIA) we can appreciate what a good run the Australia market has had since 2003. Rising commodities prices and the boom in the financial sector helped propel our stock market to new heights, but then the underlying weakness of our market was exposed. That weakness is that the Australian stock market is basically driven by financial and mining stocks.

Once those two sectors suffered a correction there was nowhere for our market to go but down. (You might recall I was wary of this in this article back in August last year) Although people were telling us all sorts of stories about how robust our economy was, our stock market suffered just as much damage as many other markets across the world in 2008.

If we strip out the resources boom by looking at a longer period we see a different story. Maybe it comes as a surprise to many readers that the DJIA over 20 years has actually outperformed the All Ords, although the race is a little tighter than what the chat below conveys if we factor in dividends.

So if you were a buy and hold type investor 20 years or so ago, then U.S stocks may have treated you better than a dabble in Australian stocks. (all depends on exchanges rates of course and at what times you moved money in and out of USD into AUD)

All Ords vs Dow Jones 20 Year Chart

xao-vs-djia-20yrs.gif

You can also see on the 20 year chart the hit the U.S. market took as a result of the tech bubble bursting in 2001. Some twits in the Australia media often use the bursting of the tech bubble to illustrate the resilient nature of the Australia economy…..of course we do not actually have a tech sector in Australia (by world standards) so we avoided that market correction by being technical morons. I have mentioned this before in another blog, I just thought I would mention it again because it really annoys me.

So looking forward we have to ask ourselves a few questions:

1. Will the Australian stock market continue to outperform the U.S. market?

2. What is likely to drive the Australia market back upwards?

3. Will we return to the heady days of 2003 – 2007?

My answers to the questions above are skewed by the fact I live in Japan. I am not bombarded by Australian business reporting and most of the macro economic analysis I read is not from Australian sources either.

Therefore I try to balance what I hear via Australian company announcements etc. with business reports from New York, Hong Kong, London etc. and from what I see here in Japan. Please keep this in mind as my views will probably be different from someone based in Australia. (and you might feel I am way off the mark)

Firstly I do not expect the Australia stock market to outperform the U.S. stock market when the next bull run comes along.  Australia has just been through a great period of around 17 years without a recession and all good things come to an end. In addition Australia has in the last 5 years or so enjoyed rising assets prices, low unemployment, cricket wins, a commodities boom and has indeed been the lucky country.

However all this luck has come at a price, Australia has not really diversified it’s economy because there did not seem to be any need to do so. Therefore in 2008 we still generally export raw materials and then import products made from these materials from countries such as Japan, China and South Korea.

If you want an image of what Australia would be like without commodities, look a New South Wales, a state in decline for some years in the midst of a global boom…scary.

I am not saying Australia will not enjoy good times again or that the Australian stock market is a bad place to invest, what I am saying is that I do not expect the All Ords to continue to outperform the DJIA over the next 5 – 10 years.

Now to answer the the second question. For the Australian market to get moving upwards again we need to see the global economy improve, geographically Australia is an island but as far as trade goes we are connected to the rest of the world via shipping lanes. I pay little attention to what the Government or Reserve Bank tell me about how the Australian economy will perform, I just watch the news out of China, Japan, Europe and the U.S. When things start to improve in those markets I will feel more confident about the Australia.

Finally say goodbye to the heady days of 2003 -2007, and I am saying that as a long term bull. I am sure the Australian stock market will provide good returns in the future but I am not expecting to see the upwards trend to be as steep as it has been in the last few years.

Remember the long term average return from stocks is around 10%, so we have enjoyed above average returns for some years. 2008 has cut us down to size and 2009 will probably just put us back onto the long term trend again (more or less)…markets are funny in that way.


3 responses so far ↓

  • 1 Eden Samela // Mar 5, 2010 at 8:40 pm

    stranger stuff has happened

  • 2 Ned S // Mar 8, 2010 at 10:46 pm

    Ken Henry will be very disappointed if he doesn’t get his “50 Golden Years” I suspect Greg? (I can only assume he is planning to live to 102 so he enjoys it all? 🙂 )

    As to the US, I must admit that a graph sometimes pops into my mind from early 2009 I’d guess, that indicated the bulk of Obama’s “real world stimulus”(?) was timed to peak around 2012 when he stood for re-election. So Dow 12,500 by then mightn’t be too silly?

  • 3 Greg Atkinson // Jun 22, 2010 at 9:23 pm

    Ned I was just reading this article again to see if I was actually close to being right and realized that your comment about the Dow might turn out to be right on the money!

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