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.

 

4 Comments
Angus
May 09, 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.

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.

Jennifer J
May 06, 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.

 

Leave a Comment:

     

RELATED ARTICLES

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

The impacts of military and geopolitical crises on share markets

What drives Australian versus global equity performance?

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Latest Updates

Superannuation

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Survey: share your retirement experiences

All Baby Boomers are now over 55 and many are either in retirement or thinking about a transition from work. But what is retirement like? Is it the golden years or a drag? Do you have tips for making the most of it?

Interviews

Time for value as ‘promise generators’ fail to deliver

A $28 billion global manager still sees far more potential in value than growth stocks, believes energy stocks are undervalued including an Australian company, and describes the need for resilience in investing.

Superannuation

Paul Keating's long-term plans for super and imputation

Paul Keating not only designed compulsory superannuation but in the 30 years since its introduction, he has maintained the rage. Here are highlights of three articles on SG's origins and two more recent interviews.

Fixed interest

On interest rates and credit, do you feel the need for speed?

Central bank support for credit and equity markets is reversing, which has led to wider spreads and higher rates. But what does that mean and is it time to jump at higher rates or do they have some way to go?

Investment strategies

Death notices for the 60/40 portfolio are premature

Pundits have once again declared the death of the 60% stock/40% bond portfolio amid sharp declines in both stock and bond prices. Based on history, balanced portfolios are apt to prove the naysayers wrong, again.

Exchange traded products

ETFs and the eight biggest worries in index investing

Both passive investing and ETFs have withstood criticism as their popularity has grown. They have been blamed for causing bubbles, distorting the market, and concentrating share ownership. Are any of these criticisms valid?

Sponsors

Alliances

© 2022 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.