Why the ASX Keeps Lagging the US

Marcus Padley explains why the ASX has lagged the S&P 500, how resources cycles drive Australian outperformance, and why ETFs are now the easiest way to access global markets.

This video goes out to all of you who have done the same thing for the last two or three decades, which is hold 20 predictable stocks in the Australian stock market, which includes things like the four banks, CSL (ASX: CSL), BHP (ASX: BHP), Rio Tinto (ASX: RIO), Telstra (ASX: TLS), Transurban (ASX: TCL), Woolworths (ASX: WOW), Wesfarmers (ASX: WES), Coles (ASX: COL). If you’re still doing that, let me give you a chart of the ASX 200 versus the S&P 500.

The only time in recent history that the ASX 200, the Australian stock market, has outperformed the US stock market was during the resources boom from 2003 to 2008. That was when China was building Brisbane every three months and buying goodness knows how much iron ore and coal. Government revenues were making politicians like Peter Costello and John Howard look like heroes.

When money’s coming into a country, all politicians look like heroes, and as you’ll see after the GFC, when everyone ran out of money, all the politicians got turned over. It was a boom period for five years in Australia, where China was buying our iron ore, the government was wealthy, and the Australian stock market went up. It was driven by stocks like BHP, Rio and Fortescue (ASX: FMG), and that wealth helped every other segment of the Australian economy as well.

Why Australia Outperforms Only in a Resources Boom

So in order for you to think about being in the Australian equity market, we need a resources boom, right? We’re not in the middle of a resources boom. Chinese GDP is slowing, and if it weren’t for a falling US dollar this year, commodity prices wouldn’t be going up as much as they have.

And this is not about gold, by the way. This is about why Australia as an index outperforms, and the only times are when there’s a resources boom. There is really no other time – except if the US market falls over. In 2021, 22 and 23, the Nasdaq fell 37.8% because the Fed got inflation wrong. They said it was transitory. It wasn’t, and they had to rip interest rates up from 1% to 5%.

When the Nasdaq falls over, our market will outperform – but it didn’t go up. There’s a difference between making money and outperformance. The only time you make money in the Australian market compared to the US market in recent history has been when the resources boom was on.

The Scale of ASX Underperformance

Is that going to happen again? Unlikely. So for all of you who have sat in Australian equities only for the last 20 years, apart from the resources boom, you’ve been in the wrong market.

And let me just point out: since the end of the resources boom in 2008, try and guess how much the ASX 200 has dropped compared to the S&P 500. Ten percent? Twenty percent? You might think we’ve underperformed by 20%. We’ve underperformed by 72.9%.

So if you’ve sat in the average obvious Australian stocks for the last two decades, you’ve missed a massive opportunity to take advantage of the US markets.

ETFs Make Global Exposure Simple

“How do I get exposure to the US markets?” If you’re still sitting in Australian stocks, you possibly haven’t heard about exchange-traded funds. Thanks to the growth in ETFs, there are now over 400 of them in Australia, and some of the biggest and most popular are still the ASX 200 ETFs.

Again, why would you bother with those when you can buy ETFs that give you exposure to the Nasdaq, the S&P 500, or themes like Big Tech, Asian tech or other countries – rather than the ASX 200? It is now very easy to get overseas exposure. These ETFs are also diversified and generally lower volatility than most of the individual stocks you’re holding.

By the way, CSL fell 15% today, just to make the point that it’s not really safe in individual stocks anymore. Everything seems to happen instantly, and when something goes wrong, it all goes badly wrong. So you avoid the individual stock risk.

You can get exposures outside of Australia – and you still should – to growth themes. And it’s all available through exchange-traded funds.

What MT20 Does Differently

That’s what the MT20 portfolio does. We invest in ASX-listed ETFs, and that has served us very well because over the last couple of years we have targeted overseas markets through ETFs. And for us, buying large individual Australian-listed stocks is so 1980s.