Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 406

Why does Australia’s skewed stock market underperform?

Australia’s mix of industries in its economy is broadly similar to all advanced economies. It is dominated by the fast-growing information and financial sectors (quaternary) as well as health, hospitality, culture and other service themes (quinary), as we see below.

Indeed, these two sectors, mainly growing fast in the post-industrial age since the mid-1960s, now account for almost 60% of our GDP.

Agriculture is tiny but mining stands out

Agriculture is a fraction of the importance it had in the 1960s and is nearly as tiny a share as the USA’s 1% of their GDP, such has been the increasing capital-intensity of agriculture that has displaced its millenniums-long labour-intensity.

But our mining industry stands out with over 10% of our GDP compared with other developed economies where this industry is a quarter or less of that importance. And it is reflected in our exports where over half our half our $400+ billion are minerals. More if downstream manufactures are added.

Stock market weightings, Australia v US

Which leads to our industry shares in the stock market, which is skewed both by minerals and financial services. As shown in the exhibit below, these two industry divisions account for a whopping 55% of the ASX's total market capitalisation.

This mix stands in vivid contrast to that of the USA, where these two divisions account for around 17% (a sixth) compared with Australia’s well over a half.

The USA has a stock market much more in tune with the new Infotronics Age of services, information and communication technologies (ICT) that displaced the goods industries and utilities of the Industrial Age up to the mid- 1960s. Their information technology sector (23% of the market capitalisation) rivals our mining industry for relative size. Then add the communications sector (10%) and ICT in total is a third of the market. It is bigger than either our minerals sector or financial services sector.

But does that explain our underperformance?

Does our skew to minerals and financial services explain why our All Ords has underperformed both the Dow Jones and NASDAQ for over 30 years and been left in their wake in the last 10 years?

No, that’s not the reason: profitability and wealth creation (dividends and share price growth) are independent of the industry. Any industry can have players with world best practice (WBL) performance. We have WBP performers in all our 19 industry divisions (as described in the first exhibit on our industry mix). As does the USA and most other advanced economies.

Other explanations often used are equally untrue, including: population size, fewer hi-tech companies, distance from markets, corporate tax regime and others.

Why are Australian companies not more profitable?

About one in 10 Australian companies achieve WBP profitability over 5-year periods while four in 10 companies do so in the USA.

The real reasons why we are lagging are more fundamental. We break too many of the keys to success rules and the most frequently breached are shown in the table below. We have to get smarter and understand strategic planning much better than we currently do.

 

Phil Ruthven AO is Founder of the Ruthven Institute and Founder of IBISWorld. The Ruthven Institute was created to help any business that wants to emulate world best performance and profitability using the Golden Rules of Success, based on over 45 years of corporate and industry analyses and strategy work. The Ruthven Institute is happy to provide a fuller explanation of these 12 Golden Rules.

 

  •   5 May 2021
  • 4
  •      
  •   
4 Comments
Jennifer J
May 05, 2021

We're lucky when all we do is dig up rocks, grow stuff and provide services to others. The US is 27% IT and we are always criticising them.

Dane
May 06, 2021

It's mind boggling that investors can have over half their equity exposure in a skewed market that represents 2-3% of the investable universe. 'Home bias' on steroids. This article is quite revealing. Shows there is some work to do if we wish to become a dynamic economy and produce more national champions that compete on a global stage. What always stands out to me is that if you compare the top 20 stocks on the ASX there has been almost no change for decades, save for a few buy-now-pay later stonks. Whereas the US market has completely evolved.

john
May 07, 2021

It doesn't matter if you only have equity in 0.1% of "the investable universe", so long as it performs, and the ASX20 certainly does. Not so much as the US in the last decade, but the comparison is complex, eg. the ASX pays higher dividends [which can be re-invested more profitably by an individual than automatic reinvestment into their company of origin], and their mostly fully franked. Ashley Owen's articles in Firstlinks [Nov & Dec 2014] and ensuing comments discusses it all in more detail. The fact that the ASX20 stocks 'haven't changed for decades' exemplifies the simplicity of the strategy, most years they churn out some billion dollar profit, and you don't need to worry about currency issues, higher brokerage, fees to advisors who want you to invest in the whole universe and beyond. But this is not what the article is about.

Angus
May 08, 2021

Did we establish there is an underperformance and the size and duration of it? I was hoping to learn something. This is just an opinion piece.

 

Leave a Comment:

RELATED ARTICLES

In a short-term world, take a longer-term view

Are franking credits worth pursuing?

Rosy markets ignore darker dividend outlook for ASX

banner

Most viewed in recent weeks

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Little‑known government scheme can help retirees tap into $3 trillion of housing wealth

The Home Equity Access Scheme in Australia allows older homeowners to tap into their home equity for retirement income, yet remains underused due to lack of awareness and its perceived complexity.

Origins of the mislabeled capital gains tax ‘discount’

Debate over the CGT discount is intensifying amid concerns about intergenerational equity and housing affordability. This analysis shows that the 'discount' does not necessarily favor property investors.

Div 296 may mean your estate pays tax on assets your beneficiaries never receive

The new super tax, applying from 1 July, introduces more than just a higher rate on large balances. It brings into focus a misalignment between where wealth sits and where the tax on that wealth ultimately falls.

Latest Updates

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Retirement

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Superannuation

Markets have always delivered for super fund members. What if they don’t?

What happens if market resilience in the face of ongoing geopolitical tensions ends? Potential decade-long market weakness shows the need for contingency planning.

Retirement

We tend to spend less in retirement …

Studies show that a drop in expenditure during retirement leads to a happier retirement. But when costs ramp up again later in life, it's a guaranteed income that makes spending more hurt less.

Shares

Can you value a share just using dividends?

A cow for her milk, a stock for her dividends. Investors are too quick to dismiss this valuation technique. 

Property

The 25-year property trust default is being questioned

The 33% CGT discount rate being floated isn’t random. It sits at the structural break-even between trust and company for the multi-property cohort. That’s driving the conversation we’re hearing now.

Investment strategies

Are active managers bringing a knife to a gunfight?

How passive investing has permanently changed market structure — and why sophisticated tools are now the price of survival.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.