Market is mirroring Australia's sporting fortunes
Unfortunately for investors, now a similar dynamic appears to be at work in the sharemarket.
Shares in Australia outperformed their global peers throughout the 2000s, as the global commodities "supercycle" ramped up, thanks to the industrialisation of economies across Asia and the developing world.
But recently, our market has shed its reputation for producing better returns than the rest of the world. In the past six months, for instance, the benchmark ASX 200 index is close to flat, compared with a rise of 7 per cent on Wall Street.
This may seem surprising, because although the economy has weakened, it's still a lot healthier than that of the US.
So why are Australian shares losing their allure compared with those in the US? And what are the implications for investors?
The main reason for the slump is our oversized resources sector. Mining and energy stocks make up about a quarter of the benchmark ASX 200 index - a far bigger share than in most developed countries. This means the sharemarket is heavily influenced by the health of the resources sector - which in turn is affected greatly by what's happening overseas.
Since the US Federal Reserve chairman Ben Bernanke signalled his intent to start winding back stimulus in May, global investors have been yanking their capital from developing or "emerging" countries - which happen to be the main source of growth for our mining companies.
As the graph shows, the poor performance of mining stocks has acted as a weight on the rest of the market all year. In fact, if it wasn't for the bumper performance of financial stocks, the entire market would have struggled in the past few months.
Investors' retreat from the emerging world could just be a passing fad, of course. Markets are notoriously fickle - there's a chance investors will pour money back into developing economies' financial markets when conditions improve.
More and more, however, it looks like a long-term shift.
A growing number of analysts are arguing that the rapidly-expanding BRIC (Brazil, Russia, India and China) economies are reaching the end of a phase in their growth spurt.
If this is correct, and these growth engines are in for a weak patch, it suggests things could remain soft for Australia's mining industry.
With mining playing such a big part in the local index, and when Australia's biggest trading partners are in Asia, weakness in the emerging world is likely to affect us more than other wealthy nations.
Drag on the market
Frequently Asked Questions about this Article…
Australian shares have lagged global peers largely because the market is heavily weighted to mining and energy. With mining stocks struggling after global investors pulled capital from emerging markets, the ASX 200 has been close to flat over the past six months while Wall Street has risen about 7%.
Mining and energy make up roughly a quarter of the ASX 200. That large weighting means the overall Australian sharemarket is strongly influenced by the health of the resources sector and by demand from overseas markets, especially emerging economies in Asia.
When Fed chairman Ben Bernanke signalled in May that stimulus would be wound back, global investors began withdrawing money from developing or 'emerging' markets. Those markets are major buyers of commodities, so the pullback hit Australian mining companies and weighed on mining stocks.
Yes. Strong performance in financial stocks has helped offset some of the drag from mining. The article notes that without the bumper performance of financials, the entire market would have struggled in recent months.
It could be either. Markets can be fickle and investors might return to emerging markets when conditions improve. However, a growing number of analysts argue BRIC economies may be slowing, which suggests the weakness for Australia’s mining industry could be more prolonged.
During the 2000s, Australia outperformed because the global commodities 'supercycle' ramped up as Asian and developing economies industrialised. That drove strong demand for Australian resources and boosted mining and energy stocks.
Because Australia’s biggest trading partners are in Asia and its market has a large resources exposure, weakness in emerging markets tends to hit Australian shares harder than many other wealthy nations. Everyday investors with heavy exposure to local mining stocks may see portfolio returns affected by swings in those overseas markets.
Investors should be aware of the concentration risk from the oversized resources sector and the sensitivity of Australian shares to conditions in emerging markets. Monitoring global commodity demand, developments in Asia, and sector performance (like financials versus mining) can help investors understand why the ASX 200 moves differently from markets such as the US.
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