Investors in Australian shares might find themselves envious when comparing their portfolio’s performance with international markets this year. With just one month left in 2025, it’s evident that the Australian Securities Exchange (ASX) has been a global laggard. Not only has it trailed behind the pivotal US market, but it has also shown weaker performance compared to markets in Europe, the UK, China, and Japan.
The ASX 200 has risen approximately 5% since the start of the year, significantly lagging behind the over 15% returns seen in the US, UK, and Europe, around 14% in China, and more than 25% in Japan. While these figures exclude dividends, which Australian companies are renowned for, there is no denying that the ASX has underperformed in 2025.
Factors Behind the ASX’s Underperformance
The primary reason for the ASX’s softer performance is its composition, which is heavily skewed towards traditional industries rather than the tech giants that dominate Wall Street. The dwindling prospects of future interest rate cuts by the Reserve Bank of Australia, reliance on a weakening Chinese economy, and a period of lackluster corporate profits have also contributed to the ASX’s weaker returns.
Globally, share markets often move in tandem, typically led by the US. However, the makeup of these markets reveals stark differences. In the US, technology companies such as Nvidia, Microsoft, Apple, and Alphabet constitute about 30% of the S&P 500 index. These tech giants, often referred to as the “Magnificent Seven,” have propelled high returns in the US, fueled by the artificial intelligence boom.
The ASX’s “Old-World” Composition
In contrast, the ASX has a distinctly “old-world” feel, with financial firms, mainly banks, making up almost a third of the index, and miners accounting for another 20%. While these companies are considered solid “blue chip” investments, they lack the growth potential of tech stocks. The ASX’s technology sector is relatively modest, comprising only about 3% of the ASX 200.
This composition means the ASX has not benefited significantly from the AI boom, although financials have performed decently, rising about 4% this year, and materials have surged more than 20%. Despite this, super funds, which now allocate more investments overseas than domestically, are expected to achieve returns close to their long-term average.
Market Sentiment and Economic Conditions
Market sentiment has also played a role. Earlier this year, when investors were risk-averse, the ASX outperformed. According to Morgan Stanley Australia equity strategist Chris Nicol, in such an environment, high-priced banks appear attractive to global investors seeking stability. However, as risk appetite returned, investors favored other markets over Australia.
Additionally, Australian companies have reported lower profits, reflecting an economy recovering from cost-of-living challenges and a weak Chinese market. AMP chief economist Shane Oliver notes that earnings per share have been soft for the past three financial years, with projections for the coming year also appearing weak.
“The Australian sharemarket is expensive relative to its own history, and relative to comparable markets such as the US and Europe,” says Perpetual head of investment strategy Matt Sherwood. “You’re paying high prices for low earnings growth.”
The Concentration Debate
The debate over market concentration has been reignited this year, particularly concerning the Commonwealth Bank of Australia (CBA). Despite being a well-managed bank, its valuation of $300 billion earlier this year raised questions. With CBA shares falling about 20% from their peaks, many investors are seeking better value elsewhere.
This concentration in a few large companies like banks and miners exposes the ASX to industry-specific risks. Nonetheless, some analysts predict a rebound. UBS strategist Richard Schellbach anticipates 2026 could bring the strongest earnings per share growth for the ASX200 in four years, driven by improved miner profits.
Looking Ahead: Potential for Rebound
While the ASX has underperformed this year, there is potential for a rebound. If Wall Street is indeed caught in an AI bubble, as some fear, the ASX’s more conservative composition could prove advantageous. Schellbach draws parallels to the early 2000s tech wreck, when Wall Street collapsed, but the ASX experienced a more modest decline.
Despite its challenges, the ASX’s bank and miner-heavy structure may outperform its tech-heavy peers under certain conditions, although this has not been the case in 2025. As global markets continue to evolve, investors will be closely watching the ASX’s performance and its potential to bounce back in the coming year.
