The Australian market may not spring to mind as one of the top-performing markets so far this century, but since 2000 it has trounced the S&P 500, according to FE fundinfo data.
The S&P ASX 200 (representing the 200 largest listed Australian stocks) is up 975.7% since the turn of the millennium, while the US S&P 500 has delivered a 753.6% return over this same period.
And yet, the markets have very different allocations within benchmarks, with the US dominating the MSCI ACWI at 63.6% of the total allocation.
Meanwhile, Australia is not even the biggest market in the MSCI AC Asia Pacific ex Japan index, coming in at fourth with just 11% of the allocation, behind the likes of Taiwan, South Korea and China and just barely outpacing India.
For Jason Pidcock, manager of the Jupiter Asian Income fund, this demonstrates that Australian equities are broadly underappreciated. Within his portfolio, it represents a 27.3% allocation, a 16 percentage-point overweight versus the benchmark.
“I think it continues to be underappreciated by global investors because people assume that, as it’s a developed economy and GDP growth rates are lower than Asian peers, the stockmarket is boring,” he told Portfolio Adviser.
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This relies on a simplistic view of the link between investing and GDP, he argued. Countries with higher GDP than Australia can be much worse investments overall, most notably China, he argued.
Pidcock sold out of China in 2022, arguing that despite high GDP, the authoritarian regime prevented many companies from achieving their true potential and contributed to poor long-term returns. Since 2000, the MSCI China index is up roughly 405.9%, well behind the S&P ASX 200’s 975.7%, according to FE fundinfo data.
By contrast, Australia is “almost like a mini-US” in terms of company quality and macro backdrop, the Jupiter manager said.
“It’s very much a private sector economy with the stockmarket full of professionally managed, private companies and the institutions in Australia are quite powerful.”
Companies in Australia are run without government interference, in pursuit of stronger shareholder returns, which is much more like the US than some Asian peers, according to the manager.
On top of this, the market tends to be ruthless towards underperforming companies, meaning sectors are led by a handful of strong performers, Pidcock said.
“There are a lot of sectors that are natural oligopolies, where three or four firms dominate market share and successfully have batted away most competitors.”
Richard Sennitt, manager of the Schroder Oriental Income fund, added: “Australia may not be the fastest growing economy across the region, but a history of decent corporate governance and shareholder returns, including via dividends, has helped see strong relative stockmarket returns over the longer term.
“From Australia you can get a broad array of sectors and companies, with a higher-than-average dividend yield, but quality similar to companies and sectors in other markets,” Jupiter’s Pidcock continued.
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For example, he pointed to energy companies as an area of interest.
He identified Woodside Energy as a particular favourite, a “world-class” energy company and one of the largest companies in the market, with quality comparable to US names, while trading at a substantial discount.
Woodside Energy has a price-to-earnings (P/E) ratio of just 15x, compared with ExxonMobil’s 25x, according to data from Google Finance.
Mining stocks were an area of interest, with both Jupiter’s Pidcock and Schroder’s Sennitt having a position in BHP, one of the largest multinational copper miners in the world.
“Here, relatively little new base metal supply is coming to market at a time of rising and electrification-driven demand”, which has helped underpin the positive outlook for its stock, Sennitt explained. Year to date, it’s up roughly 34% according to data from Google Finance.
About the only area where Australia is lacking, Pidcock argued, was in its relatively low exposure to technology (just 2.8%).
However, the Schroder manager argued this could make it compelling as a hedge, particularly compared with its highly tech-concentrated Asian peers. At the time of writing, the MSCI AC Asia Pacific ex Japan index has a 44.7% exposure to information technology stocks, driven primarily by Taiwan and Korea.
“At a time when so much of Asian market momentum is dominated by the AI trade, Australia serves as a useful diversifier away from that in a regional context,” Sennitt said. “Australia remains something of an anti-AI play.”
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