Which country’s stock market has been the best performer in the world—not just over the past six months or year or even ten years, but over the last century? One stands above all others in its combination of higher returns and lower volatility. Which one is it?
Well, they speak our language, and we have some common origins, but they have hitched their wagon to the dynamic growth of Asia. That’s right, Australia had the best performing stock market in the world from 1900 to 2009.
According to Credit Suisse, Australia posted 7.5% real (after-inflation) returns per year during that time, with a standard deviation of 18.2%. Those returns are the highest and the volatility the second lowest of the 19 major markets the researchers studied. During that time, US stocks made a 6.2% real return, with a standard deviation of 20.4%.
That means investors would have made more money in Australian stocks with less volatility than in the US or any other major market over that long stretch. Quite an achievement!
The study (pdf) was conducted for Credit Suisse by Elroy Dimson, Paul Marsh, and Mike Staunton of the London Business School, three of the world’s leading authorities on long-term performance of various asset classes.
It included 19 mostly developed-world markets but not the BRIC countries—Brazil, Russia, India, and China—or other emerging markets, because I’d guess the professors didn’t have enough reliable, continuous data on those markets to make long-term apples-to-apples comparisons.
So, what was the secret of Australia’s success? “A common factor among the best-performing equity markets over the last 110 years is that they tended to be resource-rich and/or new world countries,” the researchers write. Australia has both, for sure. That’s why the Aussies call it “the lucky country.”
The country—really a continent—has tons of coal, iron ore, uranium, zinc, nickel, and gold. It produces oil and natural gas, but oil imports are growing. It also grows wheat and other grains. The sixth largest country in the world by area, its population of only 22 million gives it the world’s third smallest population density—only seven people per square mile, vs. 80 in the US. That population lives mostly in coastal cities like Sydney, Melbourne, and Brisbane, while vast stretches of its interior (the Outback) are virtually uninhabited, semi-arid deserts.
In recent decades, the country has moved away from its Anglo-Saxon roots and embraced Asia, its rapidly growing next-door neighbor. That has paid off big time. Half of the country’s exports now go to Asia, and China is its biggest trading partner. So, Australia’s economy and markets have ridden China’s coattails to prosperity.
During the so-called “lost decade” of the 2000s, when US stocks lost ground, Australian equities earned real returns of 5.5% a year, third behind South Africa and Norway among the 19 major markets tracked.
Mining, of course, was a big factor during the ten-year commodities supercycle, as investor Jim Rogers calls it. Indeed, two of the biggest stocks in the Standard & Poor’s ASX 200 index are miners BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RTP).
But a sound banking system was at least as important. Like Canada, Australia has only a handful of big banks and like Canada, they kept their noses clean before the crisis, largely eschewing toxic securities. “Our banks are very straightforward,” says Philip Baker, an editor at the Australian Financial Review, Australia’s equivalent of the Financial Times. And they have a zero-tolerance policy towards deadbeats. “We can’t just give the keys back to the banks,” he explains. “The banks come after us and take the shirts off our backs [if we don’t pay].”
No wonder Australia’s Big Four banks are among the world’s best performers (pdf), with elite AA credit ratings.
So, it’s no surprise Australia sailed through the crisis virtually unscathed. The economy showed only one quarter of negative gross domestic product growth—short of a commonly used definition of a recession. Unemployment peaked at 5.7% and now sits at 5.3%. President Obama would kill for those numbers.
And so would Federal Reserve chairman Ben Bernanke. Zero interest rates? Quantitative easing? Australia’s central bank has already raised rates six times since late last year. And although it has paused, it may resume the hikes, as a recovery appears to be well under way.
Meanwhile, Australia’s budget deficit should peak at just over 4.2% of gross domestic product and may hit surpluses again soon. Australia has one of the world’s lowest ratios of public debt to GDP—less than 18%, according to the Central Intelligence Agency.
Ours is headed for 100%.
That will, of course, make the Aussie dollar more appealing, although it has tumbled from the highs set in 2008. Recently nervous traders have sold off the currency amid fears about the global economy. Yet it remains among the world’s stalwarts.
Can Australia’s stellar performance continue? Probably, but there are some clouds.
First, Housing prices remain in nosebleed territory. Housing prices in Australia are 82% above those in the US, Bloomberg reports. The median home price is 6.8x yearly income, vs. 2.9x in the States.
That’s why noted value investor Jeremy Grantham of GMO has said Australian (and UK) real estate is in a bubble. “Things go back to normal, even Australian housing prices,” Grantham warns. If that happens, even the soundest banks won’t be immune.
Also, beyond banking and mining, the Aussie consumer economy is struggling, says Baker. And Australia doesn’t have world technology leaders like Finland’s Nokia (NYSE: NOK) or Canada’s Research in Motion (Nasdaq: RIMM), let alone the giants of Silicon Valley.
So, Australia is joined at the hip with China. It will prosper as long as China does. Growth prospects for China look good for the next decade, even as it tries to move its economy in a new direction. But China is “the big question mark over our market and our economy,” says Baker. If China’s growth slows, “there doesn’t seem to be a backup plan.”
So, all hail Australia, the best stock market of the last century. Whether it can stay on top for the next 100 years is another story.
Disclosure: I own shares of an exchange traded fund that tracks the Australian dollar.