Aussie shares’ strength shines amid market weakness overseas

Australian shares are outperforming most global stockmarkets this year, after years of relative weakness for investors. Here’s why.

Shares in Australian companies have been among the best performers globally in the past year, but investors are being warned that a “payback” may be looming.

Since November 2021, the S&P/ASX 200 index is down 3.2 per cent. After taking into account its dividend yield near 4.5 per cent, local investors have enjoyed positive returns despite war, floods, a pandemic and fast-rising inflation and interest rates.

In contrast, US shares are down 16 per cent while the technology-focused Nasdaq index has dropped 30 per cent. Europe, China and New Zealand are down 12 per cent, Canada down 8 per cent, Japan down 6 per cent and Hong Kong down 30 per cent. Those markets also pay lower dividend yields than Australia.

Market strategist Michael McCarthy said Australia’s outperformance had been “extraordinary” and reflected a few key factors.

He said the lower Australian dollar made our stockmarket cheaper and more attractive for offshore investors, while our large resources stocks had benefited from soaring commodity prices stemming from Russia’s war on Ukraine.

All of the ASX 200’s top 10 performers have been resources stocks, including Whitehaven Coal up 253 per cent, Core Lithium up 159 per cent and Woodside Energy up 74 per cent.

“Longer term, the Australian market did not perform as well as other global markets over a five-year horizon, and a 14-year horizon since the GFC,” Mr McCarthy said.

“It could give way at any time – it’s a fragile investment environment so investors should be cautious,” he said.

Mr McCarthy said Australia’s market resilience had been impressive, although some new potential threats were emerging in industrial relations.

“Remember what your long-term goals are,” he said. “Downturns are a normal part of market behaviour, and if you are trying to time the market you are at risk of it taking off without you.”

Baker Young managed portfolio analyst Toby Grimm said the composition of Australia’s stockmarket was a key factor behind its relative recent strength.

“The biggest heavyweights on our market are favourably exposed to inflation and rising interest rates, whether it’s the resources sector with commodity prices, or financials, particularly banks,” he said.

Baker Young’s Toby Grimm sees global money is flowing into Australian shares.

“Financial stocks are positively impacted by rising interest rates … it’s helping lift bank profit margins.”

Of the 2000-plus companies listed on the ASX, the big four banks and Macquarie Bank represent more than 20 per cent of its total market value, while five resources giants including BHP, Woodside and Fortescue represent another 18 per cent.

“At the moment the market is very happy to be in these value plays that tend to perform better in rising inflation,” Mr Grimm said, adding that global capital was flowing into Australian shares.

“Eventually there will be a payback, although some may argue this is the positive payback for our underperformance in years of very low inflation.”

Mr Grimm said there also might be value in retail stocks, although the impact of interest rate rises on declining consumer spending was yet to be felt.

He said the stockmarket was not expected to climb much higher in the short-term.

“I think we are probably fairly to fully valued here. We may see a return to weakness in the first half of 2023.”