Since share markets hit a low in March 2009 during the GFC, Dr Oliver said Australian shares have increased by 138 per cent, compared with a 310 per cent gain in global shares in local currency terms, and a 500 per cent gain in US shares.
“After underperforming global shares in the tech boom in the second half of the 1990s, Australian shares came roaring back in the 2000s resources boom,” Dr Oliver said.
“This meant the 2007 high for Australian shares was a much higher high than for global shares which spun their wheels in the 2000s. So, the poor relative performance of Australian shares since 2009 is partly payback for their outperformance in the 2000s.”
He added that a slump in commodity prices in 2011, tighter monetary policy, a surging Australian dollar and fear of a property price crash were other contributing factors to the underperformance.
However, Dr Oliver said that over the last year, “Australian shares have outperformed global shares and the various comparisons in the last chart have hooked higher”.
“It could just be noise, but several fundamental considerations suggest that the structural relative underperformance since 2009 is likely to be over,” he added.
According to Dr Oliver, the factors include mean reversion and a super cycle in commodities prices.
“After 12 years of underperformance and the reversal of the 2000s outperformance, Australian shares are due for a lengthy period of outperformance. Consistent with this, Australian shares are trading on a lower forward price to earnings multiple of 14.5 times than global shares on 15.3 times and US shares on 17.1 times,” he said.
“The commodity price slump from their 2008–2011 highs look to be over with commodities embarking on a new super cycle bull market driven by constrained supply after low levels of investment and low inventories for most commodities; decarbonisation driving increased demand for metals; and increased defence spending on the back of increased geopolitical tensions which is metal intensive. This will benefit Australia’s resource stocks.”
Along with these factors, Dr Oliver also cited a lower Australian dollar making Australian companies more competitive, relatively high dividends, a thawing relationship with China and less aggressive monetary tightening.
“RBA monetary policy is no longer relatively tight compared to other major central banks, notably the Fed. It has been taking a more balanced approach to returning inflation to target,” he said.
“Higher-than-expected December quarter inflation is a concern and is now likely to see the RBA hike rates by another 0.25 per cent in February. But it’s likely to be the peak in inflation as supply is improving, freight costs have fallen and demand is slowing and it’s unlikely to see the RBA adopt a more aggressive policy compared to other major countries.”
“The period of underperformance in Australian shares compared to global shares since 2009 is likely to be over. Expect a five to 10-year period of trend outperformance, albeit there will be bumps along the way,” Dr Oliver concluded.
