Why is the Australian Market the Worst Performing Market in the World? The Australian market – represented by the Top 200 (XJO) is the only major market in the world that is yet to recover from the Global Financial Crisis (GFC).
In 2007, powered by the commodity boom, low interest rates, and growing Asian markets, the world markets went to new highs. Our market – represented by the ASX 200 (XJO) went to a new high of 6850 on 1st November 2007 before it started to decline with the Global Financial Crisis.
Our Index (XJO) is the only major Index in the world that has NOT moved over its GFC high.
Our Index, unlike most other world Indexes, is composed of more than 30% commodity stocks (XJO). The only other major Index that carries this weighting of Commodities is the Toronto Stock Exchange (TSX) in Canada.
If we look at where our market experiences growth and decline, we find a strong commonality with overseas investment in our market, which we can measure with the $AUD-$USD. This is caused partially because our commodities are bought and sold in $USD internationally.
From 2003 to 2007 the $AUD spent most of its time below $0.75 USD. During this time, we saw accelerated growth in our market aided by demand in commodities. By mid-2007 – our $AUD had breached the $0.80 level. This was the first time in recent history since the 1987 crash. There is a strong correlation between a rising $AUD in the last 30 years and a falling Australian market.
If we have a look at the XJO growth vs $AUD in the last 4 years (See Chart) we can see the strong growth occurs in our market below $0.75. We also see strong growth occurring with a falling $AUD and a reversal of our market occurring with a rising $AUD.
We have seen a massive growth in our market from below 5000 (XJO) in 2015 to crossing 6000 at the end of 2017 which has corresponded to strong commodities growth. The ups and downs have a strong inverse correlation with the $AUD.
“Our market appears to be gearing for some sort of correction”
Now in the beginning of 2018, with our market holding just above 6000, we see the $AUD rising aggressively to breech $0.80. If the last 30 years have anything to say, this will place a strong downward pressure on our market once again. In a time when we should be experiencing a strong push up to finally breach our GFC high – the aggressive rise in our $AUD will certainly insure this will not occur in 2018.
Our market appears to be gearing for some sort of correction in March. Our Institutions use Share Price Index futures (SPI) to insure large portfolios and we can see the current differential between XJO and the SPI is more than 50 pts. This is estimated to represent more than 80% institutional insurance as we move into February. This is indicative of limited upward growth from this point.
Despite the world market growing aggressively, we must consider defensive strategies on Australian stock investments while we carry a high $AUD. We can in fact use $AUD to insure our portfolio by buying the $AUD. If we see the $AUD falling back towards $0.75, we can once again look to buy stocks and expect strong growth for the next wave up in our market.
Jody Elliss has been trading and investing the stock market for the last 35 years. He is a licensed stock broker and financial planner but does not have any retail clients as he actively invests in the market and provides institutional services.