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

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Lithium's rally is real this time – but no-one trusts it

The lithium rally mirrors the early-2010s tech stock surge, with demand set to double by 2030. Supply has been slow to respond, creating a market deficit for future tech like humanoid robotics and solid-state batteries.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

How inflation is quietly moving the goalposts on retirement

Inflation doesn’t just raise today’s bills - it quietly increases the amount needed to retire, while simultaneously making it harder to save. Three steps to take before June 30th to improve retirement outcomes.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Latest Updates

SMSF strategies

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

Planning

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

Taxation

Income tax and bracket creep

Examining how five "tax cuts" stack up against bracket creep. Why offsets and incremental changes may do little to ease rising average tax burdens, compared to structural reform through indexation over time.  

Exchange traded products

The limits of a quality investing approach in Australia

Quality strategies shine globally, but Australia's concentrated market tells a different story. Limited diversification and sector dominance can constrain the defensive outcomes investors have seen in broader markets.

Investment strategies

Balancing opportunity and complexity

As private markets expand, investors face a growing mix of structures, a stabilising private equity cycle and uneven AI disruption. Fresh questions are being raised about where the real opportunities now sit.

Investment strategies

Why strong returns matter as much as generosity

As EOFY approaches, structured giving offers a tax-effective way to support charities, while allowing donations to grow over time and play a longer-term role in family wealth and legacy planning outcomes.

Investment strategies

The most important investment decision you’ll ever make

Stock picking often gets the spotlight, but research shows asset allocation explains the vast majority of long‑term returns. Understanding your mix of growth and defensive assets is the real key to investment success.

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.