Local bourse lags US in recovery after financial crisis

The Australian sharemarket posted a five-year high this week but is still well short of the record achieved in 2007, writes Max Mason.

World markets have more than clawed back their deep losses from when the US investment bank Lehman Brothers filed for bankruptcy, although the Australian market remains one of a handful yet to return to record highs.

Australia's benchmark S&P/ASX200 Index this week hit a five-year high, but is some 1600 points short of its November 2007 record.

From the peak to the low of the global financial crisis, reached in March 2009, the benchmark S&P/ASX200 plummeted 53.94 per cent.

After Lehman Brothers collapsed in September 2008, the local market lost 37.4 per cent in just over half a year.

But the United States share market, helped by a flood of cheap money, has seemingly put the worst behind it.

Both the Dow Jones and the S&P500 lost more than 40 per cent in the months after Lehman, with both also falling more than 50 per cent from their 2007 peaks.

So how far have we really come?

From the GFC low reached in March 2009, the Australian market has risen 65.9 per cent. But these gains 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 23.2 per cent from its peak reached in 2007, while both US markets are 8.2 per cent higher and are now running at record highs.

On a day-to-day basis the local index often takes its lead from the US, but the markets couldn't 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 were heavy in consumer, healthcare, broad industrials and technology companies, which had 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," said Wingate chief investment officer Chad Padowitz.

"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 last year or so, American companies were reeling in spending.

"[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," said Mr Padowitz.

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

Emerging markets have also had a strong run in the last 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 before the GFC. The MSCI emerging markets index is still down 25.9 per cent from its 2007 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.

"You have events that happen and the consequence of those events is that there are reforms," said Edward Smith, head of portfolio management at Australian Unity Investments.

"That doesn't mean we'll never see another crisis, but the cause of it next time will be something completely different which, by definition, we didn't think of before."