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90-year Aussie market study emphasises core investor lessons

Glenn Freeman  |  04 Jan 2017Text size  Decrease  Increase  |  
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Australian equity market volatility, periods of low return and a lack of sector diversification have challenged local investors for more than 90 years, according to an unprecedented academic study.


Using research conducted by the Australian Centre for Financial Studies (ACFS), in partnership with Vanguard Australia, the Australian Equities Database (AED) was released last month. It collates performance information from as far back as 1926, when much of the data was held in disparate shares exchange gazettes and individual company reports.

"One of the things that we hear currently is that we're now in a low-return world, and a lot of people look at this and think 'that's unusual', and in fact if you've grown up through the 1980s, '90s and early 2000s, it would be unusual ... people are used to a particular level of returns and have a view of the market that influences their decisions," says Professor Kevin Davis, research director, ACFS.

"But it's not the case that the returns we're seeing at the moment are necessarily that atypical, if you go back in history far enough ... there's differences over time, and we have to be careful when extrapolating from a particularly short period."

The study showed some quite dramatic shifts in the size of the Australian equities market over the period of review, including substantial growth between the 1980s, 1990s and through to 2007, at which point it fell significantly as the GFC hit.

In terms of Australian market composition, the study indicates the financial sector has always been reasonably important, "but less so from the 1950s through to the early 1980s".

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"It was fairly important during the early parts of the period, declined in market cap over that period [1950 through early 1980s], and is now almost 60 per cent of the total market," Davis says.

He points to changes in financial sector regulation over the years as one variable that has influenced this shift, describing banks as being "quite repressed by regulations" in the 1960s and 1970s, "and then deregulation in the 1980s".

"This deregulation of the financial sector is reflected in the growing share of total market capitalisation now held by the banking sector," Davis says.

In 1926, financials accounted for around 43 per cent of total market value, though this figure dipped below 13 per cent in the mid-1960s before climbing gradually over the following decades to the current level.

The mining and commodities sectors have followed a similar trend in reverting to their historical market capitalisation levels. In 1926, they accounted for around 18 per cent of the equities market, a figure which skyrocketed to around 50 per cent between the 1960s and 1970s.

Their share of the Australian market remained relatively high, between 33 and 43 per cent, until the mid-1990s, before plummeting to around 10 per cent in 2016.

According to Robin Bowerman, head of market strategy at Vanguard, a key message to investors "is that you need a long-term time frame, particularly for SMSFs ... because you can ride through some pretty significant market cycles and impacts if you have that long-term outlook".

"It also shows the evolution of the Australian market, the way the share market changes nature, rebalances and reflects the successful companies, and also those that have become less successful.

"If you look at the 100-year data for the US, for example, if you go back to the 1920s, I think 60 per cent of the index was railroads, which reflects the industrial giant of the time. And as markets have moved, effectively, the share market rebalances based on the companies that are coming through," Bowerman says.

He also points to the study's finding that market concentration has always been high in Australia as holding important lessons for investors.

"Concentration in our domestic markets is real. Some level of home market bias [for investors] is understandable ... but being able to access really diversified markets in the US and Europe makes a lot of sense for Australian investors, given the size of our market and its concentration."

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Glenn Freeman is Morningstar's senior editor.

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