The Australian sharemarket has returned 4.2% p.a. over the past 10 years, slightly lagging its 100-year average of 7% p.a. But these modest returns are heavily impacted by the starting point used. Chief Investment Officer Simon Mawhinney explains more in this extract from the latest Quarterly Commentary.

 

The Australian sharemarket has returned 4.2% p.a. over the past 10 years, slightly lagging its 100-year average of 7% p.a. These modest returns are heavily impacted by the starting point used, in this case the sharemarket levels immediately prior to the onset of the financial crisis. Since March 2009, the sharemarket has returned 12.8% p.a., well above long-term averages.

The graph shows that banks and other financial shares have been a significant driving force behind the overall sharemarket’s returns, having increased 5.7% p.a. over the past 10 years (and 18.6% p.a. since March 2009).

The graph also shows that resources companies have fared far worse. The energy sector is down 0.7% p.a. over the past 10 years and the materials sector has increased a paltry 1.1% p.a.

 

10-year sharemarket and sector returns

 

Source: Iress

 

Extending the analysis further back to capture the stellar run that resources companies enjoyed in the early 2000s does not change the results. The financials sector outperformed during this period too. The most recent quarter has been no exception, with financials contributing over half of the 4.7% gain of the broader sharemarket. This stellar performance, combined with the possibility that sector earnings are near a peak (having benefited from incredible Australian household credit growth, limited competition and exceptionally low bad debts), have directed our attentions elsewhere.

Our portfolio remains heavily skewed towards those companies which trade at reasonable multiples of current depressed earnings. We think they stand to benefit greatly when their respective cycles turn and with them, their profitability. We have tried to avoid exposure to those sectors of the sharemarket that are enjoying favourable or elevated cyclical conditions which have greatly benefited their earnings and which are priced for current favourable conditions persisting over the medium to long term.

We’ve previously written about our energy and materials investments, which appear to be cheap relative to our assessment of their sustainable future earnings. But there are other companies which currently face several cyclical and structural headwinds and appear to be attractively priced relative to our expectations of future earnings prospects. You can read more in our latest Quarterly Commentary.

 

Figures are at 31 March 2017 unless otherwise stated. 

 

Simon Mawhinney holds a Bachelor of Business Science (First Class Honours) with majors in Finance and Business Strategy and a Postgraduate Diploma in Accounting (University of Cape Town). Simon qualified as a Chartered Accountant in 1998 and is a CFA Charterholder.