Investment Matters

Market Indices: USA vs Australia

A notable gap has opened up in the performance of the US and Australia share markets.  Normally movements are quite correlated, but as detailed in the graph below, the Australian market has been quite sluggish in recent times.

 

Source: IRESS, First Samuel

Reasons?

There are likely multiple contributing factors to the variation in performance of the indices.  Four that come to mind are:

1/ Australian economy vs US economy – the Australian economy is performing only moderately (with retail under pressure) and is still going through the post-mining boom reconfiguration.  By contrast, the US economy is strong and growing, as measured by factors such as employment, manufacturing data and housing data (albeit with a challenged political environment, but we will leave such matters for W&D).  Markets are forward-looking, and thus reflective of the outlook for their economies over the next six months or so.

2/ The AUD has been strong, rallying from April to a high over 80 cents.  It has recently eased off to be ~77.7 cents.  The higher AUD makes the Australian market relatively less attractive for overseas investors.  (The financial impact on individual companies varies widely.)

3/ Australian big four banks – pressure on the banks generally (capital requirements, macroprudential measures [albeit perversely there is some short-term benefit in relation to the interest margins on investment loans], etc), and the CBA in particular (AUSTRAC regulations breach).  As can be seen, NAB and ANZ have held up, but CBA and to a lesser extent Westpac, have been under pressure.  Together the big banks are 25% of the ASX200 index.

BHP has actually had a large positive impact on the market – up almost 50% since the start of 2016.  And it is a 5% market weight. 

 

Source: IRESS, First Samuel

4/ Just as Australia has constituents of its index that, because of their significant weight, influence the overall index, so does the US S&P500.  In their case this phenomenon is not nearly as significant; the S&P500 index is considerably more diversified.  Nevertheless, the big ‘tech’ stocks – Apple, Microsoft, Facebook, Alphabet (Google, including Class A), and Amazon together comprise 16% of the S&P500 Index.  Thus, their strong share price performance over the year or so has influenced the market.