As we noted last week, the ASX 2000 has experienced severe underperformance to the US not only in the past two years, but since the GFC lows in March 2009. Fresh record highs across virtually all sectors in the US has made the last 5 years one of the most lucrative in history. Unfortunately one that the local market has not participated in.
However, the time has come for some of this underperformance to be reversed. The late stage of the US bull market is now being characterized by debate of when the Federal Reserve will begin to raise rates, the impact the US dollar’s strength will have on US corporations while the slump in oil prices have decimated the US oil sector. As a result of these factors large discrepancies are emerging between the performance of different industries and sectors. Gone are the days of Fed quantitative easing lifting the whole market.
With central bank policy around the globe no longer acting in unison, the performance of stock markets will also differ.
As shown in the chart below the relative performance of the ASX 200 to the SP 500 has been in one single direction since 2009. As the line below falls, it reflects ASX 200 underperformance. However, now this is reversing with a break of the long-term trendline and points to a period of prolonged outperformance – something not enjoyed since the bull market of 2003-2007.
This further underpins our view that those countries with central bank support are where investors need to be exposed. Additional rate cuts by the RBA this year will see the ASX 200 push through the key 6000 level where a rapid move towards 6300 is expected. That could come over a period of weeks not months once the 6000 level is breached.
Additionally it also suggests that where the ASX 200 will merely follow the US, we should be able to break free. Investors should not panic when waking any given morning and seeing the US equities have fallen. They have fallen for very different reasons that are not applicable to us. Much like why they have enjoyed one of the best bull markets that just hasn’t been applicable to us – until now.