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Why we’ve been the lucky country – in one chart

by Matthew Smith | 25 Aug 2016

Want to see what an equities market looks like after more than two decades of downturn and disaster-free returns? Look no further than the Australian share market. 

A simple chart tracking the return on one dollar invested in the ASX top 200 compared to international, fixed interest and small caps indices shows just how much uninterrupted growth can earn investors.

Asset class investment growth

Almost $11 on the initial dollar invested in 1989, according to Morningstar. That compares to the $3 you’d be left with investing in an international index (MSCI World ex-Australia) and the $5 you’d have investing in a local small caps index (S&P/ASX Small Ordinaries).

Most of these returns can be accounted for based on the returns of the major banks during this period, Chad Padowitz, Wingate Asset Management’s portfolio manager points out.

“This period encapsulates the run up of the Australian equities market from one of its lowest points,” says Padowitz, who manages a global equities portfolio. 

This is a picture of the longest period of uninterrupted economic prosperity the country has experienced, starting from a low point in the early 1990s when Australian banks were as good as trading insolvent.

Sure, the 2008 global financial crisis had its effect, but the local economy remained resilient compared to other economies including in the United States and in Europe.

International shares, meanwhile, suffered from the effects not only of the global financial crisis but also the Asian crisis around 1997 and the recession that plagued Europe and the US in the early 2000s.

As Glenn Stevens, the RBA’s outgoing governor describes in a speech in August, the Australian economy avoided a major downturn amidst massive swings in the terms of trade, “a very serious international financial crisis followed by a deep global recession” as well as the adoption of “non-conventional” policies in the major jurisdictions.

Stevens highlights that from 1993 to 2016 the average rate of inflation has been 2.5 per cent (measured by the consumer price index and adjusting for the introduction of the GST in 2000) with an average unemployment rate of between 5 and 6 per cent.

It’s the central banks’ targeting of inflation that pushed fixed income into a 25-year bull market, says Chris Dickman, fixed income investment firm Altius Asset Management’s senior portfolio manager and co-founder.

“If inflation drifted above their targets they’d tighten, below they’d go the other way. Five years of inflation drifting upwards so there was a lot of tightening during that time,” Dickman describes.

This was a period punctuated by globalisation and the expansion of the Chinese economy, Dickman highlights.   

Interestingly, Steven notes that it is this period of economic prosperity that could ultimately lull Australian investors in the local share market into a false sense of security. 

“While we like to keep retelling the story about how we didn't have recessions, I fear this risks us making the complacent assumption that we won't have them in future,” Steven says.

“It would be better to be asking how it was that these downturns were so temporary — and doing what we can to make future downturns like that. To say that does not diminish, however, the fact that this has been a very good run for Australia,” he adds. 

Indeed, most professional investors and market watchers are well aware that in the period ahead it could be a lot harder to find earnings growth which could translate into share market returns than in the last two decades.

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