Australia versus the US

First impressions can be misleading, harrumphs Marcus Padley

Marcus Padley

THE US MARKETS HAVE BEEN doing so much better than the Australian markets. The statistics don’t lie and, as any broker will tell you, some clients wish they had invested in the US instead of Australia.

Now while these numbers will have changed by the time we go to press, the principle will not have changed. As we write, if you take the S&P 500 (a far better proxy for our own All Ordinaries Index than the Dow Jones) it is up from its low on March 6, 2009, of 666.92 to a (current) high of 1563.62 almost exactly four years later. That’s a rise of 134.5% in four years or a compound return of around 23.7%.

Over the same period the All Ordinaries Index is up from its low of 3120.8 on March 10, 2009, to a recent high of 5163.5. That’s a rise of 65.4% from bottom to top, a compound return of around 13.4% or around half the return available in the US. Half the return. “Pitiful,” I hear you cry.

The net result is a lot of Australian investors think they’ve been dudded, investing in a backwater market like Australia when they could have been playing the big game in the United States. It has not only recovered everything it’s lost since 2007 but is now hitting new all-time highs. Meanwhile, Australian investors are having to put up with an All Ords Index that is still down 27.4% from its highs, would have to jump another 37.7% to hit its all-time high and another 46.6% to match the returns US investors have enjoyed in the S&P 500 index.

So let’s just put this straight once and for all.

If you were sitting on $100,000 cash in Australia on March 6, 2009, and with perfect stockmarket timing decided to convert it into US dollars and invest it in the S&P 500 index at the lowest low, you would have ended up with an investment in the US market of $US64,040. If you then rode the US market for all it was worth over the next four years to the all-time high this month you would have ended up with $US150,174.

If, with your godlike timing, you then managed to pull out at this highest high a week ago and converted your money back into Australian dollars at $US1.0414 to the dollar, you would now have $A144,203 for your trouble.

As you will no doubt have worked out, that’s a total return for an Australian investor investing in the US market with perfect timing of 44.2% which is, amazingly for some, somewhat less than the 65.4% you would have achieved just by leaving your money invested in the All Ordinaries Index in Australia.

In other words, rather than whingeing about what you’ve missed out on in the US, you should be thanking your lucky stars that you are 21.2% better off from ignoring the opportunity and doing nothing more imaginative than buying an index fund in Australian dollars.

And that has not only been a lot less hassle, it also doesn’t take into account the costs involved in your currency transactions which, as everyone knows, would have stung you a few more percentage points just on the spread, let alone the commissions – and that lost money going in would have shown up, compounded, in your returns coming out.

It doesn’t stop there. If you do the same calculation and include dividends you get an even better result for Australians. If a local passive investor had invested in the All Ords and included their dividends in their returns, they’d have actually made 96.4% from low to high over the past four years, 31% more and a compound return of 18.4%pa, almost 5% more a year. The US market has a yield of around 2.3%.

Compound that into your S&P 500 returns over the past four years and the US market is up 151.9%, not 134.5%, and an Australian investor doing the perfect thing in the US with a currency exchange would have made 54.9% instead of 96.4%, but would be 41.5% worse off investing in the US, not 21.2% worse off.

Bottom line. An equity market index doesn’t mean a lot if it’s priced in Zimbabwean dollars.

Marcus Padley is the author of the daily stockmarket newsletter Marcus Today. For a free trial of the Marcus Today newsletter go to www.marcustoday.com.au

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