Data Diary

Chinese growth hormones and other performance enhancers

Posted on 20 August 2010

Australian equities have benefited from two major trends over the last couple of decades (casting aside the credit bubble on the grounds that it hurt).  They are 1) the growth in our compulsory superannuation investment pool and 2) the growth in China’s demand for all things resources.  It’s interesting then to compare and contrast the relative contributions of the finance and resources sector to our national wealth.

If there was any doubt about the importance of the umbilical cord between Australia and China, the following chart mapping the relative performance of some of the world’s stockmarkets bears this out:

Australia’s economy, that was being at risk of being left behind in the sandpit in 2000, has ridden the China bull all the way to the bank. We can see the importance of the resources sector in driving this performance in a comparison of the materials to the financial sector over the same period:

The sucking sound emanating from the financial sector is profoundly disturbing.  Remember that over the same period our pension savings pool rose from ~$500bn to ~$1,500bn, and our household debt climbed from $350bn to $1,250bn currently!

One more perspective on this – consider the following chart from the ASX (here) that gives a breakdown of market capitalisation by sector in 1989 and 1999:

In the midst of the Asian crisis, admittedly as a swathe of Australia’s mining sector was being repossessed and the average return on shareholders equity was just north of zero, the market capitalisation of the sector was ~$100bn in comparison to ~$200bn for the finance sector.  Fast forward to today, and the financial sector is around $425bn versus a resources sector closer to $400bn.

With the Australian economy at best stalling, hope our surrogate continues to take their vitamins.