Why does the ASX follow Wall Street?

This weekâs Big Question comes from Rick Stephens of Balwyn, Melbourne, who asks: Why does the ASX slavishly follow Wall Street's lead when the US matters less and less to our economy? Hamish Douglass of Magellan Financial Group responds.

By Hamish Douglass ·
10 Aug 2007

PORTFOLIO POINT: Ignore the Dow. Investors will fare better by keeping a clear head and taking advantage of panic buying and selling.

Yes, it seems the movement of the ASX can be correlated with the Dow. If the Dow takes a significant hit you can bet the next day’s trade on the Aussie market will reflect this. Lemming-like, Aussie investors tend to take their lead from all things US, whether it’s the Dow, tech stocks or pork belly futures.

Investors are making a huge mistake if they focus on any index let alone the narrowly based and unrepresentative Dow Jones Index of 30 stocks, which are not even weighted by value or market capitalisation.

Large institutional investors are the culprits to finger for their adherence to all things Dow, and then reflecting this through the ASX 200.

Private investors have a big advantage over the bulk of institutions who are slavishly forced to hug indices, provided that the investors focus only on the fundamentals and are not panicked into buying or selling simply because others are doing one or the other.

Behavioural finance research says you are better off if you ignore the gyrations and investors particularly should ignore a narrow index such as the Dow Jones (or Shanghai for that matter).

Investors will make and keep their wealth by clear-headed analysis that takes advantage of panic buying and selling by others – and they have less stressful lives as well! After all, if you went out for a coffee during trading last week you might have missed 5% or more moves in individual stocks first down then up in an afternoon, which is ridiculous in comparison with their underlying values.

It is completely illogical for the Aussie market to follow the Dow. My business partner Chris Mackay relates a story about buying Foodland shares when they dropped when the first Iraq war occurred. Foodland was a monopoly West Australian wholesaler and there was no way one of the scud missiles was going to land on Joondalup, WA.

The companies in the Dow are as uncorrelated to the Aussie market as is possible in this day and age and it is only Pavlovian investor behaviour that links them so slavishly.

Hamish Douglass is portfolio manager of Magellan Global Fund and chairman of the Magellan Financial Group.