By Callum Thomas, MMgt (finance), MMgt (banking), BBS (finance), Investment Strategist of AMP Capital
The unwinding of the commodity supercycle has returned Australian equities to a valuation discount vs global equities, which is grounds for becoming incrementally more positive on Australian equities vs global equities.
Comparing the ASX 200 vs MSCI World equities (in local currency) simply on price (as with the analysis above), there has been a clear link between the commodity boom and the relative performance of the ASX 200 vs global equities. Remembering that along with the commodity super cycle, the ASX had also come from a starting point of extreme undervaluation vs MSCI world (which was partly a result of the dot com boom). With the end of the commodity super cycle, the ASX has seen a prolonged period of underperformance and has returned to a valuation discount against global equities (vs valuation premium in the past 5-7 years). This is a notable development because as we know, starting point valuations are hugely relevant for future investment returns. You could probably say that the commodity/currency aspect could still have some downside but it too has unwound significantly from the overshoot of the past decade; so at this point I would say that we’re closer to the bottom of the range on that front. Therefore, the headwinds caused by high relative valuations and the commodity supercycle unwinding may nearly be done. Incrementally, this begins to present a more positive case for Australian equities relative to global equities.
Theme in pictures
Source: AMP Capital, Bloomberg
About the Author
Callum Thomas, MMgt (finance), MMgt (banking), BBS (finance), Investment Strategist
Callum is an Investment Strategist in the strategy team of the Multi Asset Group at AMP Capital. Callum has a passion for global macro investment strategy and constantly strives to generate unique and innovative insights that help inform the strategy team’s dynamic asset allocation process. Callum is responsible for researching a range of asset classes and global macroeconomic themes to aid in formulating investment strategies across the Multi-Asset Group. He also keenly collaborates with the global equity and fixed income teams. Callum originally joined AMP Capital in June 2009 as an analyst in the investment business of what was then AXA New Zealand. He previously worked in strategy at the New Zealand Stock Exchange.