Australia’s Stock Market Hits a Five-Year High

By Ari Charney • September 27, 2013 • Pacific Digest

Despite the challenges facing Australia’s economy, the country’s share market closed at a fresh five-year high, up 68.7 percent on a price basis since the S&P/ASX 200 hit its low in early 2009 amid the Global Financial Crisis.

But because Australian equities tend to offer high payouts, the market’s performance has been even stronger on a dividend-reinvested basis, with a total return of 118.6 percent over that same period. Based on the latter, the S&P 500 lagged the Aussie market by nearly 31 percentage points during that time.

This clearly shows the strength of a resource-backed economy coupled with a more dividend-oriented corporate culture. And though Australia’s dominant resource sector is peaking, the country’s slowing economy is likely still the envy of US central bankers.

The official US unemployment rate has been on a more or less steady downward trend since late 2011, recently hitting a four-year low of 7.3 percent. But at least some of that progress is due to a shrinking labor force resulting from a dismal job market that’s discouraged some from actively pursuing employment.

Meanwhile, Australia’s unemployment rate may be just a tenth of a percentage point below its five-year high of 5.9 percent, a level last hit during the Great Recession, but that figure would be cause for celebration in the US. And Australia’s labor force participation rate, recently at 65 percent, is nearly two percentage points higher than that of the US.

Even though Australia’s full-year gross domestic product (GDP) growth is expected to decline by 1.2 percentage points, to 2.5 percent, that’s still better than the 1.6 percent growth expected for the US economy.

While the bubble in global commodities has partially deflated, Australia’s newly elected government has pledged to scrap two of the more deleterious policies plaguing its resource sector: the carbon tax and the Minerals Resource Rent Tax (MRRT), a levy on the super profits of the country’s largest miners. As is typical of politicians, both taxes were enacted at the height of the resource boom, underscoring the extent to which many elected officials take wealth creation for granted.

Another major headwind has been diminished thanks to the newfound hawkishness of the US Federal Reserve relative to the easing bias of the Reserve Bank of Australia (RBA). That sudden shift finally undid the Australian dollar’s surprising strength compared to other global currencies, among which the Aussie has been one of the worst performers this year.

While the Aussie is up from its year-to-date bottom in late August of USD0.89, it recently traded near USD0.93, which is down about 12.3 percent from its high in early January. The currency briefly spiked last week when the Fed blinked on curtailing its quantitative-easing program, and it could jump higher again if the US economy shows other signs of weakness.

Even so, a Bloomberg survey of economists shows that the currency is likely to head even lower in the years ahead, possibly hitting a sustained bottom around USD0.87 by 2015. While the Aussie’s relative strength offered US investors an extra inducement to invest in the country’s stocks, its recent weakness should help struggling companies compete more effectively in the global market. That will help boost earnings, which should presumably flow through to share prices.

Finally, the RBA is in the midst of a two-year easing cycle, with short-term rates now at an all-time low of 2.5 percent and expected to inch even lower over the next nine months or so. Historically low rates should be a boon to both the Australian economy in general, as well as providing a cheap source of capital to companies that are investing for future growth.

The great Australian growth story may be facing some near-term challenges, but we believe it will surmount many of these issues in the years ahead.

The Roundup

Our analyses of Portfolio companies’ recent earnings reports are linked below.

Conservative Holdings

Aggressive Holdings

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