Why the Dow peaks and the ASX doesn’t

The bulls are back: the Dow has hit a new peak four years after its GFC trough. Photo: Louie DouvisDow spikes to new record highThe Dow: old but not irrelevant
杭州桑拿

Why has the US sharemarket reclaimed its pre-financial crisis high when the Australian sharemarket is still 25 per cent short of it? Because in fundamental ways the Americans are better than us.

The US economy was the epicentre of the global crisis and the junk bond debt bubble that caused it. A half a decade later its debt to GDP ratio is too high at about 75 per cent, and it is still struggling to grow.

Gross domestic product will be below 2 per cent this year in all likelihood now that automatic government spending cuts totalling $US85 billion are feeding in. Unemployment is down from its peak of 10 per cent in October 2009, but still 2.5 percentage points higher higher than it is here, at 7.9 per cent.

Sharemarket investors buy the future rather the present, however, and when they look at the US market and the companies that inhabit it, they like what they see.

The surge in America’s jobless rate that accompanied the crisis came as companies laid off workers, and unemployment is falling in America now because those workers are getting their old jobs back, but because the US economy is creating new jobs. The productivity gains that came with the job cuts will be retained by the companies that produced them.

The US economy is also on the verge of harvesting a big economic dividend as its massive reserves of shale gas underpin a heavy industry renaissance. Cheap domestic gas will deliver a production cost advantage that will last for decades.

Americas continue to own the technology that is being harnessed in high growth areas of the global economy including information technology, and US companies are being protected in their home market and supercharged in export markets by a US dollar that is being kept low by the US Federal Reserve’s zero interest rate regime and quantitative easing.

They hold record cash reserves of about $US5 trillion, have extremely healthy balance sheets after cleaning out the rubbish exposed by the crisis, are benefiting from the lowest borrowing costs in history, courtesy of the Fed and operate in the biggest consumer market in the world. Take a look at that list: what’s not to like?

Australia on the other hand has relatively higher borrowing costs even after the Reserve Bank’s rate cuts, higher domestic energy costs that are only partly a result of the carbon tax, and a highly valued currency that is hurting export competitiveness and opening local producers up low priced import competition.

Despite all that, and despite the fact that the S&P/ASX 200 share index is 25 per cent below its November 2007 high of 6828.7 points, Australian shares are on average more expensive than their US counterparts.

The Dow Jones Industrial Average that reclaimed its pre-crisis highs overnight is valued at about 12.5 times expected earnings in the next year. The S&P index of 500 top US shares which now only 1.6 per cent below its pre-crisis high is valued at 13.6 times expected earnings. Our S&P/ASX index of 200 shares is trading at 14.5 times expected earnings.

How can this be? You might like to think of its as the Emperor’s Clothes effect. The resources boom shored up Australia’s economic growth was it was raging, and also shored up the value of the sharemarket.

But it also pushed the value of the the Australian dollar higher, and forced the Reserve Bank to keep interest rates relatively high, to contain p[rice and wage inflation coming out of the mining sector.

Now the resources boom has cooled, and as interest rates and the $A remain relatively high, the underlying pressure on the industrial sector of the sharemarket is exposed. Earnings growth has been moderate to poor, and as share prices have risen as part of a global rally, price-earnings ratios have jumped beyond those on offer overseas.

Many quality Australian companies still offer dividend yields that look good compared with fixed interest, and the northern hemisphere rally is underpinned an improvement in confidence that the world is finally skipping free of the crisis and and a hunt for yield that is lifting all boats.

Australia’s sharemarket is short of its all-time high for good reasons, though: compared with Wall Street, it’s got some issues to deal with.

The original release of this article first appeared on the website of Hangzhou Night Net.

Published in: 杭州楼凤

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