Whats wrong with Australian Equities?

October 26, 2011

Australian Equities, FOREX

What’s wrong with Australian Equities and the ASX 200. While we are all either consumed by the machinations of Europe or awaiting the Australian CPI this morning I thought I’d ask a question – one that I don’t have an answer to. Anecdotally it seems to me that our market seems to lag the upside and underperform on downside (fall further) all the while the Australian Dollar is the darling of the currency world. As I write even with all the turmoil going on at the moment its sits atop parity by some margin. This is unusual given history but speaks volumes of the rerating of Australia, or does it?

I wonder.

Have a look at this chart of the AUD/USD exchange rate, the S&P 500 and the ASX 200 since the start of the GFC. I have selected the beginning of July 2007 as my nominal start date as it was around then that the first Soc Gen SPV’s blew up – if I remember rightly.

The Australian Dollar has clearly outperformed everything. But interestingly, and I didn’t get this feeling till I just put this chart together until the QE2 induced US equity rally the ASX 200 had been moving in lock step with the US market moves – at least on a percentage basis from the start of the crisis. I wont bother to talk about the folly of diversification these days or how much the Australian Dollar’s appreciation would have cruelled the overall returns to a so-called diversified or balanced portfolio – that is for another day.

The chart above is a more recent snapshot which highlights that the Australian Dollar is running more closely with equities but the ASX 200 is lagging. here is the technical snapshot of the ASX 200 and you can see that it is in a recent downtrend that it has failed to break through again this week. As you know technicals are fundamental to my analysis framework so this is important resistance but not so much as the 3848 level I highlighted when we were all pessimistic. Now the ASX200 is off 1% today after failing at both the trendline and important Fibonacci resistance at 4297 just recently. If it can’t break that level then its not going up.

But you know what – the most interesting thing about this analysis is the answer I have got now that I have written this piece. That is, there is nothing wrong with Australian equities per se – they just missed out on the QE2 induced hyper run north. But the other thing is that, while we all know it, the Australian Dollar is at the mercy presently not of our terms of trade or even our economy but equity sentiment and risk appetite.

So I’m back where I started consumed with and worried about the machinations of Europe.

Oh and I still like a very over weight fixed interest slant in my investment and super portfolio.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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