We can't match America's muscle

Why has the US sharemarket reclaimed its pre-financial crisis high when the Australian sharemarket is still 25 per cent short of it? Because in important ways, the Americans are better than us.

The US economy was the epicentre of the global crisis and half a decade later it is still struggling. Its debt-to-GDP ratio is too high at about 75 per cent and is expected to grow by less than 2 per cent this year, as automatic government spending cuts totalling $US85 billion feed in.

Australia's new national accounts reveal this economy expanded by 3.6 per cent last year.

The annual run rate was 2.6 per cent in the second half of the year and the Reserve Bank is watching the slowdown closely, but Australia will log its 22nd year of growth in 2013 and probably outpace America.

Sharemarket investors buy the near future, rather than the present or a more distant future where, in America, structural problems become impossible to ignore. When they look at the US market they see potential. They also see better value: even after racing ahead of Australia to reclaim its pre-crisis high, the American market is cheaper.

The surge in America's jobless rate that accompanied the global crisis came as companies laid off workers. The productivity gains that flowed will be largely retained as new jobs are created. After falling from 10 per cent cent in October 2009 to 7.9 per cent, America's jobless rate is still 2.5 percentage points higher than Australia's, but it is falling.

Australia is posting productivity gains after losing its way for most of the past decade. The gain in 2012 was 3.3 per cent, better than the 2.5 per cent growth rate in the mid-'90s, when Australia famously collected a deregulation dividend. National productivity will get another boost as resources projects that have sucked up capital begin producing and generating returns. Companies are also on efficiency drives as they look to offset soft demand.

If you are betting that this economy will be more productive than America's over the long term, you are assuming a sea change. However, America's long-term productivity growth rate of about 2.2 per cent a year is twice as good as Australia's.

The US economy is also on the verge of harvesting an economic dividend as its massive reserves of shale gas underpin a heavy industry renaissance. Cheap domestic gas will deliver a cost advantage for decades.

American intellectual property sits behind market hot spots including information technology, and US companies are being protected in their deep home market and supercharged in export markets by a US dollar that is being kept low by the US Federal Reserve's zero-interest-rate regime and quantitative easing. They hold record cash reserves of about $US5 trillion, have healthy balance sheets after the crisis purge and are borrowing money at historically low rates.

Australia has higher borrowing costs and higher domestic energy costs, and its currency is at levels that hurt export competitiveness and open up companies to low-priced import competition. External factors including zero interest rates and quantitative easing in America are behind the Australian dollar's strength, but it is what it is.

This economy is also attempting a delicate shift in activity to the industrial sector as the resources boom cools. Private capital expenditure led by the miners contributed almost two-thirds of Australia's 3.6 per cent GDP growth in 2012, but it fell by 6 per cent in the December quarter and will fall more this year. The question, not answered in the latest national accounts, is whether the non-mining economy will accelerate and close the gap.

Despite all that, and despite the fact the S&P/ASX 200 share index is 25 per cent below its November 2007 high of 6828.7 points, the Australian market is more expensive than Wall Street.

The Dow Jones Industrial Average, which hit new highs on Tuesday night US time, is valued at about 12.5 times expected earnings in the next year. The S&P index of 500 top US shares is 1.6 per cent below its high and valued at 13.6 times expected earnings. Our S&P/ASX 200 is trading at 14.5 times expected earnings.

While the resources boom was raging, cracks in the industrial economy were being papered over. Now the boom has cooled. Commodity prices have eased, mining profits and mining company share prices have fallen and as interest rates and the Australian dollar remain relatively high, pressure on the industrial sector continues. Earnings growth has been outpaced by share price rises and our market has moved to a price-earnings premium.

Australian companies still offer dividend yields that look good compared with fixed interest and the productivity gains are great news. A fall in the value of the dollar will be a game changer, and it will eventually happen. For now, though, this market has some pressure points. It is short of its pre-crisis high for good reason.

mmaiden@fairfaxmedia.com.au