A 100-year history of the Aussie sharemarket

The price-earnings ratio for the Aussie sharemarket is almost exactly at its 80-year average, new research by the RBA shows

By Patrick Commins  19 June 2019  Australian Financial ReviewAs we approach all-time highs on the ASX even as the economic outlook grows gloomier, it may feel like a time of great frothiness on the sharemarket.

Certainly, we are living in a world of financial market extremes. This is, after all, a period in which Kiwi stocks are more expensive than Wall Street’s tech sector.

Then there’s the recent “fake meat” bubble (an ugly visual).  Shares in vegan-friendly Beyond Meat have soared 690 per cent since the company listed on the New York Stock Exchange in early May.

The RBA data goes all the way back to 1917 to construct a 100-year history of the Aussie sharemarket. AFR

It might feel crazy, but closer to home, the reality is different – normal, even.

In fact, the price-earnings ratio for the Aussie sharemarket is almost exactly at its 80-year average, new research by the Reserve Bank shows.The report, A History of Australian Equities by RBA economist Thomas Mathews, weaves together hand-collected data on listed companies between 1917 and 1979 to create a century-long picture of the performance and vital statistics of our sharemarket. (The valuation data is slightly shorter – going back to 1937.)

There are plenty of interesting details from this unique data set.

Between 1917 and 2019, Aussie shares managed an average compound return, including dividends, of 10.2 per cent, or 6.3 per cent after inflation. The standard deviation was a pretty hefty 19 per cent.

Ten-year government bonds generated an annual nominal return of 6.2 per cent, and a real return of 2.3 per cent, with a standard deviation of 7.6 per cent.

The RBA’s estimate of long-term performance of Aussie stocks is similar to that of Credit Suisse’s London-based research institute, which estimates a compound annual total return of 6.7 per cent after inflation, or 10.7 per cent nominal. These numbers are in US dollar terms, but I suspect that over the long term the currency effects would tend to cancel out.

The RBA research shows that, at a high level, not much has changed on the ASX.

The financial and resources sectors make up about 60 per cent of the exchange by market cap. Rather depressingly, this was also the case a century ago. Even the proportions are roughly the same: financials account for two thirds of this chunk, and resources one third.

This makes sense when you consider what have been the big economic drivers of the past 20 years: twin once-in-a-lifetime credit and mining investment booms.

Ours remains a land of oligopolies. As I wrote recently, oligopolistic companies account for half of the total profit of the top 200 ASX-listed companies.

So perhaps it’s no surprise that of the top 10 listed companies in 1917, six remain in various forms among the top 10 today – and two more are in the top 200.

To wit: the Bank of New South Wales was the largest listed business 100 years ago, and ranks third in 2019. Then there’s Bank of Australasia (3) and Union of Australia Bank (4), which merged in 1951 to become ANZ (5). Commercial Bank of Sydney was ranked sixth on the exchange in the early 20th century, and merged with National Bank of Australasia to become NAB in 1982 (still ranked sixth on the ASX).

Then there’s Howard Smith, which owned the BBC hardware chain and was acquired by Wesfarmers in 2001, and, of course, the Big Australian: BHP today and the ASX’s second-biggest name, Broken Hill Proprietary back then.

“In contrast, only one of the top 10 US companies in 1917 is still in the top 10 today,” Mathews writes.

Indeed, Australia’s listed corporations are old in a global context: weighted by market capitalisation, the average listed company in Australia today is 105 years old, compared with 77 years in Japan, 82 in the United States and 95 in the United Kingdom, the RBA economist says.

The data set shows very clearly how the introduction of franking credits in the early 1980s provided a powerful impetus for companies to return cash to their shareholders.

Aussie listed firms doubled the proportion of profits they paid out in dividends over the following 15 years or so, moving from a payout ratio of below 40 per cent to nearer 80 per cent. Australian companies had largely tracked American companies in this regard, but from the 1990s Aussie payout ratios stayed high even as their American peers fell, eventually to sub-40 per cent today.

original article here

John Garrett

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