Why is Australia’s stock market struggling?
Why is Australia’s stock market struggling?
Australia’s economy seized the record for the longest streak of recession-free growth after recording 1.8% y/y growth in the second quarter of 2017. Although the country witnessed miraculous economic activity with 26 years of unbroken growth, if one looks a little closer, the picture appears less rosy than what the growth numbers project. The country’s share market has largely underperformed its developed peers, despite sustained economic growth, indicating that the country’s economic model may be in need of a rethink.
The capitalisation of Australia’s stock market has not changed much since the global financial crisis. Resources and financials represent around 54% of the S&P/ASX 200 index. This benchmark index composition is more or less similar to what it was 10 years ago. If we look at the top five Australian companies by market capitalisation today, they are the same as 10 years ago. While the Australian stock market struggled to expand over the past decade, its Asia-Pacific peers such as India and South Korea have flourished.
Not just foreign investors, even domestic institutional investors are shying away from the Australian stock market, as they seek to capitalise on lucrative opportunities elsewhere. The Australian market has failed to attract the expanding pool of domestic pension fund capital, as pension fund managers are eyeing better investment opportunities abroad.
Improved focus on innovation could aid S&P/ASX 200
Absence of a sizable tech sector is one of the key factors why the Australian market has lagged its peers in recent years. Stock market expansion in developed countries is primarily driven by rapidly-growing, disruptive technology companies. For instance, technology stocks account for nearly 20% of the S&P 500 index compared with just 1% for the S&P/ASX 200. The country’s failure to produce innovative companies or new-generation blue-chip stocks is a major reason behind corporate Australia’s failure to evolve with time.
Nevertheless, it must be acknowledged that the start-up ecosystem in Australia is still in its nascent stage, with scope for the government to come up with foresighted policies in a bid to prop up Australian start-ups. Singapore has set a good example in terms of bolstering the start-up ecosystem in a country.
Economic model may need a rethink
Leaving the GDP numbers aside, the Australian economy has struggled to transition away from mining-led growth. The country’s economic growth still depends heavily on its natural resources (iron ore, liquefied natural gas and coal). Moreover, a booming housing market that facilitated economic activity over the past decade has led to an overvalued property market, if we go by fundamental measures such as price-to-rent or price-to-disposable income. The housing market boom has been supported by availability of easy credit and historically low interest rates; however, housing market activity in the country appears more speculative than fundamental.
Political stability and reforms to improve investor sentiment
International investors typically give significant importance to factors such as political stability and strong government mandate while evaluating any investment opportunity abroad. This factor has kept a large pool of foreign funds away from the Australian shores. Continued political dysfunction adversely impacted the country’s prospects, as successive governments have failed to implement much-needed reforms. The nation has seen five prime ministers in less than 10 years; the lack of strong leadership stifled the country’s reform journey. Political leadership failed to enact any major economic reform in the past decade, with about every effort overturned by growing hyper-partisanship.
While most of the stock markets globally have given stellar returns this year, the Australian market has struggled to generate positive returns, with the benchmark S&P/ASX 200 gaining a meagre 1.3% YTD (as of 9 October 2017). The Australian market is in need of a trigger that could revive market and investor sentiment. Although Australia’s economic transition has been slower-than-expected, it's not all glum for the country. The fact that Australia has managed to sustain economic growth for such a long duration suggests that there are things that are going right for the economy. Investor confidence is expected to return as the country moves forward with its economic transition and introduces the much-needed policy reforms.