Trumped: Why the ASX is inferior to Wall Street’s cheaper sharemarket
The “Trump trade” is dominating world markets and Australians are rushing into Wall Street stocks. What’s more, it looks like the trend will strengthen from here on because American sharemarkets actually offer better value.
After several years when US shares completely outperformed Australian shares, many in the market now regard the US sharemarket as overheated.
But new research from the Morningstar investor research group suggests it is the ASX – despite much weaker returns – that is more than twice as expensive as Wall Street.
The US-based research group says “Australia ranks among the most expensive markets we cover”.
The report points out that the ASX is more than twice as overvalued as the US – and the US is overvalued compared with the rest of the world.
Over the past 12 months everyday Australian investors have voted with their wallets, moving huge amounts of money into Wall Street stocks.
With most Australians accessing the US through products such as exchange traded funds, Australians invested $15bn in international ETFs in 2024. That figure was more than double the flows into Australian-based ETFs. (US shares dominate all “international” share funds and represent about 65 per cent of the total.)
Moreover, this is a dramatic new trend. It seems like 2024 was the year Australians finally decided to switch serious money into US stocks.
Only a year earlier, the numbers were reversed. In 2023 Australian ETF investors put $5bn into the ASX and $3bn into overseas stocks
“As a country we are over-indexed towards Australian stocks,” Morningstar market strategist Lochlan Halloway says.
“ When you couple that with concerns over China this year, you can see why these flows to US shares are happening.”
Certainly, the US has for several years offered much better returns than the ASX and that’s even when the local market’s substantial dividend payouts are included. In calendar 2024 Australian shares offered 11 per cent whereas US shares on the S&P 500 offered 23 per cent.
For the year ahead, market forecasters expect US shares to once again double the performance of the ASX. The US benchmark, the S&P 500 is expected to offer total returns in the order of 8 to 10 per cent while Australian stocks are expected to offer 4 to 5 per cent.
Morningstar says Australian shares currently trade about 9 per cent above fair value compared with a 4 per cent premium on US markets.
“There is no definitive answer on how much exposure an investor should have to the local market. But the average allocation seems high and this comes into sharper focus when our market looks overpriced,” the Morningstar report says.
While Australian shares had a better-than-average year in 2024, the performance was heavily underpinned by financial stocks, especially Commonwealth Bank. In turn, the concentration of large-cap stocks propped up overvaluation across the wider market.
One of the local market’s most important investors, the Australian Foundation Investment Company, offered a sober outlook for the ASX when it announced a modest 2.7 per cent lift in profits this week.
AFIC said in a note to investors that “following two strong years of performance, the Australian equity market now appears fully priced”.