30 Oct 2012

Many investors have been wondering why the Australian stock market has so significantly underperformed the US market since the 2008 financial crisis. We have been told many times how well our economy has performed relative to the rest of the OECD and how beneficial is our proximity to Asia. This is noted in an informative article by Don Stammer in today’s Australian. Don points out that Australia’s real GDP is 10% higher than it was when the crisis began while in the US the net gain is just 1%. Nevertheless our share market is down 19% for the past 5 years while the US is up 4%.

The key to understanding this seemingly anomalous outcome is that markets look to earnings growth from listed companies, not to the performance of the economy per se. The lower US dollar and the greater capacity for productivity growth makes the USA  a more attractive market in which to invest. Australia suffers from our high dollar and low productivity outlook which threaten to keep corporate earnings depressed – and hence the under-performance of our market.

So it is prospects for earnings growth, not GDP growth, that appeals to equity investors.