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 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.

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 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.

 

Leave a Comment:

RELATED ARTICLES

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

A case study in good business culture versus bad

Where Australia's largest ethical investor is finding opportunities

banner

Most viewed in recent weeks

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Latest Updates

Investment strategies

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Economy

A pullback in Australian consumer spending could last years

Australian consumers have held up remarkably well amid rising interest rates and inflation. Yet, there are increasing signs that this is turning, and the weakness in consumer spending may last years, not months.

Investment strategies

The 9 most important things I've learned about investing over 40 years

The nine lessons include there is always a cycle, the crowd gets it wrong at extremes, what you pay for an investment matters a lot, markets don’t learn, and you need to know yourself to be a good investor.

Shares

Tax-loss selling creates opportunities in these 3 ASX stocks

It's that time of year when investors sell underperforming stocks at a loss to offset capital gains from profitable investments. This tax-loss selling is creating opportunities in three quality ASX stocks.

Economy

The global baby bust

Across the globe, leaders are concerned about the fallout from declining birth rates and shrinking populations. Australia, though attractive to migrants, mirrors global birth rate declines, and faces its own challenges.

Economy

Hidden card fees and why cash should make a comeback

Australians are paying almost two billion dollars in credit and debit card fees each year and the RBA wil now probe the whole payment system. What changes are needed to ensure the system is fair and transparent?

Investment strategies

Investment bonds should be considered for retirement planning

Many Australians neglect key retirement planning tools. Investment bonds are increasingly valuable as they facilitate intergenerational wealth transfer and offer strategic tax advantages, thereby enhancing financial security.

Sponsors

Alliances

© 2024 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.