ASX continues to underperform

CONCERNS about China's growth, the strong dollar and the lacklustre outlook for banks combined to make the local sharemarket one of the global laggards last month.

By InvestSMART · 2 Mar 2012

By InvestSMART ·
2 Mar 2012

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CONCERNS about China's growth, the strong dollar and the lacklustre outlook for banks combined to make the local sharemarket one of the global laggards last month.

The S&P/ASX 200 Index rose a modest 0.8 per cent, placing it well behind the Nikkei in Japan, which jumped 10.5 per cent and the Hang Seng in Hong Kong, which rose 6.3 per cent, on growing optimism for the health of the global economy.

The market's underperformance extends a year-long run in which the ASX 200 has lost 11.5 per cent compared with the Dow Jones index, up 7.4 per cent or the Nasdaq, up 8.3 per cent.

Even among falling markets, the ASX has dropped more than most, with the Nikkei down only 9.2 per cent in the year, and the Hang Seng shedding 7.7 per cent.

"The Aussie sharemarket is very heavily weighted to resource and financials and rightly or wrongly there are growing doubts among investors about whether China can grow at 8 per cent per annum," the head of research at Bell Potter Securities, Peter Quinton, said.

China's economic growth slowed to 8.9 per cent in the year to December, from 9.1 per cent in the year to September, with authorities pledging to maintain growth above 8 per cent despite fears among global investors that China is due for a sharp downturn.

The earnings growth for banks is expected to remain weak in the next year as households reduce their borrowing and many parts of the domestic economy miss out on the benefits of the boom in the mining industry.

"Every time you talk to a foreign investor, they either mention all of those things, or one of them [in relation to local stocks]," Mr Quinton said.

The ASX 200 has got off to a slow start this month, led lower by mining stocks. The HC Securities director Luke Cummings said the index remained under a cloud for that reason as well as the strength of the dollar, which is putting pressure on earnings of companies that rely on exports and also having a similar effect on businesses focusing on the domestic market.

"DJs, Myer are being killed by the ability for consumers to buy overseas products online and have them shipped to Australia," Mr Cummings said.

The Australian dollar rose to US$1.07 over the month from US$1.06, helped by the Reserve Bank's surprise decision to keep rates on hold.

"I think the strength of the Aussie dollar has been the main issue and will probably continue to be for some time," Mr Cummings said.

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Frequently Asked Questions about this Article…

Why is the ASX underperforming other global markets right now?

The article says the ASX is underperforming because of worries about China’s growth, a strong Australian dollar and a weak outlook for banks. These factors hit a market that’s heavily weighted to resources and financials — the S&P/ASX 200 rose just 0.8% last month while the Nikkei jumped 10.5% and the Hang Seng rose 6.3%.

How does slowing China growth affect Australian shares and miners?

Because the Aussie market is concentrated in resources and financials, doubts about China’s ability to sustain high growth reduce demand expectations for commodities. The article notes China’s growth slowed to 8.9% year to December (from 9.1% previously), which has investors worrying about the outlook for resource companies.

What impact is the strong Australian dollar having on company earnings?

According to the article, the stronger Aussie (it rose to US$1.07 from US$1.06) is putting pressure on earnings for companies that rely on exports and also hurting businesses that focus on the domestic market, because a high AUD makes exports less competitive and encourages consumers to buy cheaper overseas goods.

Why are bank earnings expected to remain weak over the next year?

The article explains bank earnings growth is expected to stay weak as households reduce borrowing and many parts of the domestic economy miss out on benefits from the mining boom, which together dampen loan growth and demand for banking services.

Are mining stocks dragging the ASX 200 lower?

Yes. The article says the ASX 200 got off to a slow start led lower by mining stocks, and that weakness in the mining sector is one reason the index remains under a cloud.

How are retailers like DJs and Myer affected by current market trends?

The article quotes an industry commentator saying DJs and Myer are being hurt by consumers buying overseas products online and having them shipped to Australia—an example of how the strong dollar and global e‑commerce are squeezing some domestic retailers.

What role did the Reserve Bank decision play in recent market moves?

The Reserve Bank’s surprise decision to keep rates on hold helped lift the Australian dollar to US$1.07, which the article highlights as a factor putting pressure on earnings for export‑dependent companies and domestic businesses.

What key indicators should everyday investors watch based on this report?

The article suggests watching China growth data and official commentary, AUD/USD moves (the Aussie’s strength), mining stock performance, bank earnings and household borrowing trends, and Reserve Bank policy decisions — all of which are cited as drivers of ASX performance.