Australia underpriced?

OK, Australian mining’s booming. But the stock market is not reflecting it. A report by Deutsche Bank ranks equity market returns in local currency since the beginning of last year. Australia comes second last, with only Brazil doing worse. Both countries are beneficiaries of the commodities boom and China’s rise, which tells you something about how markets tend to be priced in advance, not in retrospect. It also shows the importance of the currency on the stock market. About 40% of the Australian market is held by foreign institutions, and they have been selling out as the Australian dollar rose (the higher the $A gets, the more likely it will fall at some point against the foreign investors’ currency).

Deutsche believes foreign investors are becoming less nervous. “Over the year to September 2010 (foreign investors) actually withdrew $2.5 billion from the market, compared with an injection of $60 billion into the market in the previous corresponding period.” It was not just the currency that spooked foreigners. The political uncertainty surrounding a resources tax also affected international sentiment. Poor little darlings. Can’t have those countries trying to look after their national interest or industry base — must be communists.

The outflows are stabilising and Deutsche forecasts, a little optimistically, that earnings jumps will be more likely reflected in share prices this year. In their favour, there is also the prospect that domestic super funds will start to come back in. At the moment, they have a high proportion of the money in cash: 16%, about twice the level in 2008, before the GFC hit.

Don’t expect much retail interest. Australia’s heavily indebted households are continuing to avoid equities.

The comparison of world stock market returns throws up some intriguing results. It showed the growing trend for money to go to Asia. Intriguingly, Thailand, Korea, Russia, Hong Kong and Malaysia topped the list of stock markets, with returns well above 20 per cent. The supposedly ailing United States returned almost 20%. Meanwhile, the new global hegemon China did not do well, in part because it only has about 800 stocks, mostly government owned, it is fixed on the capital account so international investors cannot get direct access and it was ludicrously over valued in any case. The United Kingdom may have a struggling economy, yet the stock market return was nudging 20 per cent. Japan was terrible, but when isn’t Japan terrible?

And Australia? Only just in positive territory. Once again the investment lesson is clear. Markets price in advance. Buy on bad news, sell on good news. And if you know something that is not yet in the news, then good returns might be around the corner.

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