Update No. 52 – 23/03/12

I’ve been thinking a lot about the differences between the performance of the Australian and the US markets, particularly over the last 6 or so months.  For those of you who don’t follow these markets closely, an interesting thing has been happening.  The Australian stock market has stagnated relative to the US markets performance.  This is made especially interesting by the prevailing view that the Australian economy is in a much better state of health than the US economy.  Since the start of October last year, the ASX200TR is up about 9%, in the same period the S&P500 is up about 24.2%, the fact the dividends are included in the chosen Australian indices makes the gap even wider.  It got me thinking about how much the power of the newly anointed ‘worlds largest company’ by market capitalisation (Apple) has caused that gap.  The reason I began to wonder about this was when I saw this Felix Salmon article which mentioned the fact that over the 8 trading days to March 15 the market capitalisation of Apple had grown by US$70 billion.  He puts that in perspective by pointing out this increase is more than the ENTIRE market capitalisation of the supposedly all powerful Goldman Sachs.  To put an Australian spin on it, there are only 2 companies in our entire market that are worth more in their entirety than the amount Apple’s market value increased by in 8 days – BHP Billiton & Commonwealth Bank of Australia.

So when contemplating the chasm in valuation that has opened up between the two markets, I found myself thinking ‘Apple is massive, it must be distorting things’, even causing the bulk of the gap.  Not so it turns out; the Dow Jones Industrial Average (which excludes Apple) has also advance 24.2% in that same period (same as S&P500 which includes Apple) so that line of thought is clearly wrong.  What is not wrong is the fact that for some reason US stocks are considerably more buoyant than Aussie stocks.  The reason I suspect predominantly derives from the fact that since the nadir of the GFC, the US currency has weakened substantially against a basket of global currencies and a great proportion of US industries are multinational in nature, thereby increasing the US dollar value of these foreign earnings.  Contrast this with a substantial element of the largest Australian companies who also have large international elements to their business and/or derive a substantial proportion of earnings from exports, such as the miners.  These companies of course face the strength of the Aussie dollar, and even though many report in US$, Aussie investors are still converting these earnings back to AU$ and seeing weak EPS growth.  Probably an extended period of stability in the relationships between the two currencies would see the Aussie market outperform, though there are a great many contributing factors and the market as we know rarely is perfectly rational in the short run.

I have always thought one of the greatest strengths of the American mindset, observed as one large group is the ability to be optimistic.  I know at an individual level many Americans complain about the power and influence of the very wealthy, but I think Americans, more than any other people feel deep down in their cockles that combining extremely hard work with a good idea, they will likely find extraordinary success. I think Australians are just as industrious and intelligent, but sometimes we hold ourselves back with our more pragmatic nature.  To be our best, we Aussies probably need to dare to dream a little more… – Tony Hansen 23/03/12.

EGP Fund No. 1 Pty Ltd. Up by 7.36%, leading the benchmark by 0.62% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 3.34%, leading the benchmark by 10.84% all-time (April 1^st 2011).