A long ride reaching a deceptive high

A rise of 66 per cent in the local bourse since the GFC must be taken with a grain of salt, reports Max Mason.

Sunday will mark the 1826th day since US investment bank Lehman Brothers filed for bankruptcy.

In those five years, including one leap year, world superpowers have been brought to their knees as financial markets and economies struggled under the weight of collapsing institutions, government bailouts, mortgage defaults and crippling unemployment levels.

From the 2008 peak, reached in March 2008, to the GFC low in March 2009, the benchmark S&P/ASX200 Index fell 50.4 per cent.

After Lehman Brothers collapsed in September, the local market lost 37.4 per cent in half a year.

This is hyperbolised even further when we turn to the US.

Both the Dow Jones and the S&P500 collapsed upwards of 40 per cent after Lehman, with both also falling close to 50 per cent from their 2008 peaks.

So how far have we really come?

This week, the ASX200 hit a five-year high. From the GFC low reached in March 2009, the local bourse has risen 65.9 per cent.

But this must be taken with a grain of salt.

"The Lehman collapse and subsequent financial crisis has made average retail Australian investors much more wary of equity markets," said Platypus Asset Management chief investor officer Don Williams. "Relative to other sharemarkets, the Australian market post-GFC hasn't delivered very good returns for investors."

Using Wall Street as a comparison, the Dow Jones has surged 134 per cent since its GFC low, while the S&P500 has delivered a rise of 149 per cent.

The Australian market is still down 17.4 per cent from its 2008 peak, while both US markets are more than 15 per cent higher.

On a day-to-day basis the local index often takes its lead from the US, but the markets could not be more different in terms of composition, which plays a big role in terms of the way they will generally trend.

"The two big sectors here are financials and materials, and they tend to be small in the other markets. Financials are nearly 50 per cent of the market here," Mr Williams said.

Comparatively, other exchanges are heavy in consumer, healthcare, broad industrials and technology companies, which have been a leading sector in terms of earnings growth and performance, he said.

Profit growth, which has only just begun to return to Australian companies this year, has been the sustenance, along with quantitative easing, of Wall Street's recovery.

"[In the US] the recession from the GFC created a lot of excess capacity in the economy, so that allowed a lot of costs to go down and hence the profit margins of companies have gone up accordingly," Wingate chief investment officer Chad Padowitz said. "So you've got record high margins and relatively resilient revenue, because the combination of very weak monetary policy and somewhat supportive fiscal policy has helped keep the demand side going."

While Australian capital expenditure continued to push higher, until the past year or so, American companies were reeling spending in.

"[US] firms were very hesitant to expand and invest in new capacity, so their cash flows went up accordingly and they've used that, in a larger extent, to buy back shares," Mr Padowitz said.

Along with record low cash and borrowing rates, further supported by the US Federal Reserve's $US85 billion ($92 billion) monthly bond-buying program, share buybacks helped support stock price recoveries.

Emerging markets have also had a strong run in the past five years. Since reaching its GFC low in October 2008, the MSCI emerging markets index has soared 118 per cent, after sliding 46.9 per cent following the collapse of Lehman.

But much like the Australian market, emerging markets have failed to return to levels seen prior to the GFC. The MSCI emerging markets index is still down 20.7 per cent from its 2008 peak and in recent months has looked a little shaky as the price of borrowing money has increased.

"For many years they had been reforming their labour markets, product markets, privatising industries and so on," Mr Padowitz said. "[But] it looks like emerging markets used weak monetary policy to borrow cheaply and delay reform."

Some of the biggest outcomes from the GFC have been the wiping out of companies and the disappearance of many different financial products, such as collaterised debt obligations, which are a diversified pooling of junk bonds to form an investment-grade product, which have been criticised for fuelling the crisis and will likely never be seen in that form again.