Underperformance in every metric

At the close of trade in May, the ASX had underperformed global markets by 8% - the start to June has only seen this underperformance accelerate.

Iron Ore
Source: Bloomberg

The state of play

- The index’s performance as a whole is severely disappointing and shows that even with an income, the ASX is being used as a funding source for other growth bourses and that is unlikely to change in the next four months

- Westpac is back in a bear market and showing no signs it will be supported in the short term – even with a current net yield of 5.8%.

- Telstra is also under real pressure testing support at $6.08 having been as high as $6.39 three to four weeks ago.

- The macro environment locally is still lacklustre – there is no consistent sign monetary policy is actually impacting the areas that need it most.

- While bottom up micro views are exhibiting profit warnings and EPS growth through further consolidation and divestments rather than corporate revenue growth.

- Here are the cold hard fact that clearly show how badly the ASX is underperforming compared to regional and global peers. On a year-to-date perspective in each index’s local currency the ASX is outperforming the US.

 

Index                             Points       YTD

Shenzhen Composite     3041          114.91%

Shanghai Composite      4909          51.79%

CSI 300                          5144          45.59%

MIB                                 23608        24.18%

CAC                                5034          17.82%

Nikkei                              20,473       17.32%

Hang Seng                      27657        17.17%

DAX                                 11419        16.46%

NASDAQ                          5099          7.67%

FTSE                               6950         5.85%

ASX 200                          5583         3.19%

S&P 500                          2114          2.68%

DOW JONES                   18076        1.42%

However, once you start comparing the ASX in AUD and USD terms the ASX has clearly become a funding index.

In AUD

Index                             Points   YTD in AUD

Shenzhen Composite     3041       125.88%

Shanghai Composite      4909       59.54%

CSI 300                           5144       53.02%

Hang Seng                      27657    23.04%

MIB                                  23608    21.43%

Nikkei                               20,473   18.62%

CAC                                 5034      15.22%

DAX                                 11419    13.89%

NASDAQ                          5099       13.03%

FTSE                                6950       9.37%

S&P 500                           2114       7.80%

DOW JONES                    18076    6.47%

ASX 200                           5583       3.19%

 

In USD

Index                                    Points     YTD in USD

Shenzhen Composite               3041         115.19%

Shanghai Composite                4909         51.99%

CSI 300                                    5144         47.78%

Hang Seng                              27657        17.20%

MIB                                          23608        15.67%

Nikkei                                      20,473        12.99%

CAC                                        5034            9.75%

DAX                                         11419         8.48%

NASDAQ                                  5099          7.67%

FTSE                                       6950          4.18%

S&P 500                                  2114          2.68%

DOW JONES                           18076        1.42%

ASX 200                                   5583       -1.67%

Yes the ASX in USD terms is in the red for the year and the fact the AUD is expected to decline further in the coming six months means this figure is unlikely to reverse in the foreseeable future.

What is even more worrying in currency terms is the ASX in JPY. The Japanese are big investors in Australia due to its defensive yielding nature and the ease of the carry trade. However when the ASX is compared to other indexes in JPY (one the Japanese invest heavily in), the returns are starting to look less and less appealing.

Index                    Points   YTD JPY

Hang Seng              27657    21.91%

Nikkei                      20,473   17.32%

DAX                         11419    12.33%

FTSE                        6950       8.39%

S&P 500                   2114       6.82%

DOW JONES            18076    5.51%

ASX 200                   5583       1.88%

Even if you look at the ASX accumulation index, the ASX would only just cover its nearest peer in the DOW. The Japanese carry trade into Australia will be question if this underperformance continues.

Ahead of the Australian open

Yesterday, the ASX closed just under the 200-day moving average at 5583 the bear signs are suggesting this has further room to move.

The GDP figures have certainly not helped the situation either – real GDP looked good with a pleasing beat on consensus. However the reasoning behind it; net exports and inventories are temporary elements and will filter out in the coming quarters. The fact domestic demand was zero and nominal GDP year on year was 1.2% suggests the underling economy is struggling to keep its head above water and on a year-on-year perspective GDP has declined.

However, the reaction in the interbank market to Tuesday’s RBA statement coupled with the stronger than expected real GDP read has seen every month all the way out too December pricing in the chance of another 25 basis point rate cut at sub 30%. The ‘most likely’ month being Melbourne Cup Tuesday in November at 27% - the easing cycle for 2015 appears over from the market’s perspective and with no further central bank assistance the ASX is blowing in the wind.

If the trade balance backs the current account numbers from Tuesday today and retail sales are mildly positive, the AUD’s depreciation to sub 75 cents has only one hope in the next three to four months and that’s Fed funds rate lift off.

Australia’s winter is here and the ASX is clearly being left out in the cold.

We are currently calling the ASX up seven points to 5590. However, the direction of the market currently is clearly to the downside. The ASX is due a relief rally however the strength and size of that rally is likely to be swallow and quiet weak.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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