This article first appeared on the Yahoo7 web page at this link: 


The Australian stock market is a global dog.

At a time when stock markets in the big, industrialised countries are zooming to record high after record high, the ASX200 index is going no where. So poor has the performance been that the ASX is around 20 per cent below the level prevailing in 2008.

It is a picture most evident in the last few years. Since the middle of 2013, the ASX 200 has risen by just 10 per cent. The US stock market, by contrast, has risen by 50 per cent, in Germany the rise has been 55 per cent, in Canada the rise has been 20 per cent, in Japan the rise has been 45 per cent while in the UK, with all its troubles, the rise has been 15 per cent.

So what has gone wrong?

In large part, the slump in mining investment and trend to lower commodity prices has undermined mining stocks and the firms that supply them. In addition, there is a deal of uncertainty about the banking sector which is by far the largest part of the ASX.

The big banks derive around two-thirds of the profits from mortgages and current debate about housing bubbles, crashes and booms have many investors taking a cautious approach to investing in bank stocks. This caution with reference to banks has crimped the performance of the ASX.

From a macroeconomic view, the last few years has seen persistent sluggish bottom line GDP growth. One area of ongoing disappointment is consumer demand. With record low wages growth and a high level of underemployment and unemployment, consumer spending has been soft. This has dampened retail stocks, many of which are trading at multiyear lows.

In addition, there is large and growing competition from overseas firms (Aldi, Costco, Amazon to name a few) and this is forcing retailers to cut selling prices and with that their profit margins. At a time when spending growth is also subdued, this other important sector of the ASX has been weak.

Another reason for the general soft nature of the ASX has been a lack of domestic investor flows. With the housing market booming, investors have been keen to pump their investment funds into dwellings rather than stocks. This has proven to be a wise investment given the relative performance of both asset classes but it may explain why stocks have been persistently weak.

This divergence in investments between stocks and housing has been largely absent in other countries. It is also important to note that the comparison of stock market performance does not include dividends which in Australia, tend to be higher than elsewhere. When account is taken of dividends, this reduces the extent of the Australian market under-performance, but the headline weakness remains.

It seems a bit obvious to note that for the ASX to become an out-performer in the period ahead, some mix of rising commodity prices, a normalisation of the housing market and a persistent lift in the rate of economic growth are all needed.

The RBA is very upbeat on domestic and international growth, against the general consensus which is a lot more cautious. If it is correct, the ASX should be stronger. If, as appears more likely, the next year sees moderate growth persist and with that wages and inflation stay low, the ASX will likely stay sluggish.