The narrative of the US stock market’s ‘exceptional’ performance compared to Australia’s index has been widely discussed. However, a closer examination reveals that reality may not align with this perception. While the US Technology sector, particularly the NASDAQ Composite, has recently outperformed other indices, this does not encompass the entire US market experience.
Similar to Australia’s All Ordinaries Accumulation Index (AOAI), the Dow Jones Industrial Average (DJIA) spans a variety of sectors. The NASDAQ’s recent success, driven by the so-called ‘Magnificent 7’, has led to its significant outperformance over Australia’s ASX Technology Index (XIJ) since the third quarter of this year. Despite this, it is crucial to recognize that the NASDAQ is merely a subset of the US market, much like the XIJ within Australia.
Comparative Market Analysis
When comparing entire markets, the picture shifts. Historical data shows that over the long term, Australian equities have actually outperformed the US market, achieving these returns with less volatility. The compound average annual return for the Australian market over the past century stands at 10.15%, compared to the DJIA’s 7.85%.
“Australian equities have outperformed the US over the long term, achieving these returns with less volatility.” – Katana Asset Management Analysis
Furthermore, the AOAI has never experienced a negative average annual return over a decade, unlike the US market, which averaged -4.97% per annum during the depression years. This historical perspective challenges the common perception of US market dominance.
Market Cycles and Performance
Market strength is cyclical. In the decades ending 1965, 1975, and 1985, the ASX outperformed the US market significantly. However, in more recent decades, the US has taken the lead. This cyclical nature suggests that the current period of Australian underperformance is part of a larger pattern.
In the decade ending 2015, the ASX experienced a notable underperformance, with capital growth at a mere 1.18% per annum, excluding dividends. Such periods can skew perceptions, but historical cycles indicate that stronger performance will likely return.
Future Prospects for Australian Equities
Despite current challenges, history supports the view that the ASX will experience a period of stronger performance. The National Bank of Canada recently highlighted Australian equities as having some of the best long-term prospects, a sentiment echoed by global asset managers overseeing over $27 trillion.
Several factors contribute to this optimism:
- Immigration: Australia’s quality of life attracts skilled and affluent migrants, impacting capital flow and consumption.
- Resources: As the second-largest producer of natural resources, Australia benefits from growing demand for LNG, lithium, and critical minerals.
- Tourism: With some countries limiting tourist visas, Australia is well-positioned to capitalize on its proximity to emerging middle classes in China and India.
- Superannuation System: Australia’s superannuation pool is the fourth largest globally, supporting a stable financial hub.
- Agriculture: The global demand for protein is rising, and Australia’s clean, abundant land is well-suited to meet this need.
Additional areas of potential include the international student industry, health expertise, and a burgeoning entrepreneurial sector. While the exact drivers of future outperformance remain uncertain, historical patterns suggest they will emerge.
Conclusion
In summary, while the US market has recently outperformed, Australian equities have historically delivered superior returns with less volatility. Market cycles indicate that periods of underperformance are temporary, and numerous factors suggest a promising future for the ASX.
Romano Sala Tenna, Portfolio Manager at Katana Asset Management, advises that this article is for general information and does not consider individual circumstances. Readers should seek financial advice before acting on this information. Past performance is not indicative of future results, and stock market returns can be volatile, especially in the short term.
