As the Australian ASX All Ordinaries Index slowly crawls towards the 5000 level again, now is a good time to look at how some stocks have come through the global financial crisis. Does it look like a global recovery has finally taken hold, and is the Australia stock market poised to surge higher over the next few weeks?
Firstly let’s have a look at how our stock market has faired compared to the U.S. stock market by looking at the charts of the All Ordinaries Index vs the Dow Jones Industrial Average. (Dow Jones)
All Ordinaries (XAO) vs Dow Jones Industrial Average (DJIA)
Now according to many financial commentators in Australia our economy is now closely aligned with the Chinese economy and therefore no longer coupled to a large extent with the U.S economy.
Well if that is true, somebody forgot to tell the stock market and stock investors, because over the last 3 years the ASX All Ordinaries and the Dow Jones Industrial Average has moved in pretty much the same pattern as you can see clearly from the chart above.
But hold on? Didn’t the U.S economy suffer a major recession? Didn’t the U.S. housing market fall into a heap? Isn’t unemployment at record levels in America? So why isn’t the U.S stock market trailing our stock market by a big margin?
In fact, over the last 3 years the Dow Jones has outperformed the All Ordinaries..surprising isn’t it?
Of course the U.S. Government has borrowed a massive amount of money and thrown that into the economy to try an limit the damage caused by the recession, so this may be one reason U.S. stocks are holding up surprisingly well.
Another reason is that many American companies have still been doing quite well in recent times, Apple Inc for example. The U.S. economy may not be doing so well now, but it is still the world’s biggest by quite a considerable margin.
But to be honest the chart above looks different to what I expected and actually I am surprised by how our stock market has fared compared to the Dow Jones. If anyone can shine some light on why this is happening then I am all ears as they say.
So what is going on with the Australian share market?
Well stocks like the Commonwealth Bank (CBA) and Westpac (WBC) are not holding back the ASX All Ords as the chart below illustrates.
Commonwealth Bank (CBA) vs Westpac (WBC) vs All Ords (XAO)
In fact both these stocks are getting back to near their pre-crisis levels, and much of this has to do with the strength of the housing market in Australia. The fact that many small non-bank leaders were squeezed out of the home loan market has also helped the big four banks. I guess it all looks pretty good for the major banks as long as their loan books stay in fairly good shape.
On the commodities front we have been lucky so far in that demand and prices for the things we export like iron ore and coal have held up fairly well, whereas the price for oil is still below the highs of 2008.
Australian World Wide Exploration (AWE) vs BHP Billiton (BHP)
The chart above shows how well a commodities play would have worked out if you had purchased a stock like BHP during the dark days of late 2008/early 2009.
But you had to ride the right company as the share price of the oil and gas exploration company Australian Worldwide Exploration (AWE) illustrates. Just for the record I have generally been selling BHP as the stock price has risen and be buying a stock like AWE, simply because I think oil/gas prices will run up again. (and also because I think the Chinese appetite for commodities will come off the boil soon..although few people seem to agree with me)
Finally let’s have a look at two blue chip Australia stocks that have not been doing too well over the last 3 years.
Telstra (TLS) vs Qantas (QAN)
Telstra (TLS) and Qantas (QAN) shares have really struggled over the last few years and are examples of the major stocks which are holding back the overall rise of the ASX All Ordinaries and S&P/ASX 200.
Telstra is in a tough spot at the moment since the Federal Government apparently believes it is a good idea to undermine an Australian company, in order to help two major foreign companies like Vodafone Huthison and Optus.
Qantas on the other hand is an example of how tough the airline business is and even though oil prices are down, the company is still finding it hard to get people to fly at the pointy end of the aircraft.
In fact Qantas shares have underperformed Telstra shares over the last few years and since these are widely held stocks in Australia, this must be hurting a lot of self funded retirees and share market investors.
Overall what the charts suggest to me is simply what most people already know – that the Australian economy is still weak and that housing, commodities and government spending is what is keeping the GDP numbers positive.
Therefore I don’t see Australian stocks surging ahead in the next few weeks and would say that the chances of another little sell off/correction are pretty high.
But that is how I think the situation is now, what do other people think? Perhaps I am being too cautious?