Sluggish market explained

Countryman

One of the big questions our clients are asking lately is why is Australia's stock market underperforming many of the other global stockmarkets?

There have been impressive rallies in the order of 15 per cent on offshore exchanges in the United States and Europe in recent months, yet the Australian stockmarket has rallied by only about half of that.

One explanation relates to the actions being taken in Europe and the US to manage the global financial crisis.

Many Western economies are battling huge debts and stalling economies. To combat this, they are flushing their economies with cash, lent at super-low interest rates.

Much of this money finds its way into the stockmarket and recent money printing sprees in Europe certainly correlate closely with their local stockmarket rises.

Of course, Australia isn't taking any of this action, because it's in a stronger economic position and so the Australian market is not benefiting from the same flow of funds.

Another reason for Australia's relatively weak stockmarket lies with the Australian economy itself.

While the mining boom continues to produce great profitability for businesses directly linked to resources, much of the rest of the economy is finding things harder.

Banking and finance, retail, property, manufacturing and many more areas of the economy are doing it tough - and the share prices in those sectors reflect this.

Speaking of the mining boom, Australia's heavy reliance on resources as a driver for national economic growth is also a reason for its recent stockmarket underperformance.

News coming out of China suggests that its economy may not be as strong as hoped, and Australia's markets are pricing in the risk of a slowing China hurting mining companies.

Further complicating the matter is the high Australian dollar, which limits the flow of money into our stockmarket from overseas. This is a big factor and is often overlooked, but much of the money invested in our stockmarket comes from offshore.

As the $A rises, this makes our stocks seem expensive to overseas investors and they stay away.

Offshore investors are also hesitating from investing in Australia due to the ongoing shenanigans of the current Government.

The recent leadership tussles were big news on the global business channels and a further dampener to invest in the country.

Add that to the uncertainty stemming out of the mining and carbon taxes and you have an environment where offshore money simply stays away.

As these factors change in the coming months, the Australian market will no doubt adjust and resume a more globally-linked performance. But for the time being, the market is following its own path.

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.

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