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US shares outperform, but analysts doubt rally will continue
US shares are outperforming Australian shares as technology related companies boom behind the potential of artificial intelligence while falling commodity prices drag down the big Australian miners, but some analysts expect that outperformance could reverse if bond yields move higher.
Duncan Burns, head of investments and the Vanguard Equity Index Group, Asia-Pacific, says that US stocks, led by tech and the semi-conductor sector, have seen a resurgence this year despite slowing economic growth, rate increases and stubborn inflation. But he expects that it may not last.
“While US stocks might be outperforming at present, there’s no guarantee this rally will continue, as the best performing asset class one year is not guaranteed to be the best the next,” Burns tells The Inside Investor.
Diana Mousina (pictured), deputy chief economist with AMP Investments, says expectations that AI will drive high profits and productivity growth has boosted US technology shares. However, a rising risk of recession threatens the recent gains in US equities. Moreover, bond yields could move higher if the US Federal Reserve raises official interest rate higher than expected, which is a rising risk, and tech stocks may pull back.
“Perhaps some further momentum in the US share market is likely, but I don’t think its durable or sustainable,” Mousina says.
However, Australian shares could also come under pressure “from the weakness in the Chinese economy, as the recovery has been faltering”.
Shane Langham, senior private wealth adviser with Sequoia Wealth Management, is backing the Australian market to be the outperformer for the second half of 2023 and 2024 over US shares – and over the longer term.
“There is no doubt that these mega cap US tech stocks have run with Nvidia up 25 per cent after its most recent profit report, gaining something like US$200 billion dollars in market cap overnight. With moves like this it makes you think how much more is in it.
“This is where it comes back to your view as to where you believe you will have the best return on your fund, in the US or Aussie market. We know the reason to invest in the US is technology, but the reason to invest locally is commodities, especially the future facing commodities which are essential for the electrification of the world economy. These are like oxygen if the world stands half a chance of reaching the 2030 and 2050 carbon emissions reduction targets,” Langham says.
“Whether or not the major economies slip into recession, there is still going to be the need and demand for these commodities, not just over the next year or two, but strongly out to 2030 then 2050,” he says.
“The Aussie market is in a good position to accommodate this investment as we have some of the world’s biggest miners and richest deposits of just about every commodity needed to make this happen.”
Long term underperformance
Over the long term, Australian shares have underperformed US shares. For the past twenty years, Vanguard Australia have produced an index chart tracking the performance of major asset class indices. The 2022 chart reveals that US shares have outperformed Australian shares by around two percentage points per annum. Australian shares have delivered an average return of 9.8 per cent per annum, following the return of 11.8 per cent p.a. on US shares. Listed property has returned 9.3 per cent on average p.a., followed closely by international shares, as the chart below shows.
| $10,000 Investment in 1992 | Investment value in 2022 | Per annum returns |
| Australian Shares | $131,413 | 9.8 per cent |
| US Shares | $182,376 | 11.7 per cent |
| Australian listed Property | $90,243 | 9.3 per cent |
| International Shares | $94,184 | 9.1 per cent |
| Australian Bonds | $55,588 | 6 per cent |
| Cash | $35,758 | 4.4 per cent |
To maintain a robust portfolio, Vanguard’s Burns says investors need to stay diversified despite the tech surge.
“Investors should be mindful of the impact this current rally can have on their asset allocation and their target risk profiles in the long run; a rebound as such might lead to investors being overweight in US or tech stocks and therefore overexposed should the rally end.
“Intelligent diversification is not just investing in a bunch of different things; it’s investing in a bunch of things that respond differently to the same factors or phenomena. Holding a diversified portfolio, with a global mix of growth assets across equity markets and defensive assets such as high-quality bonds, is therefore an investor’s best bet against market unpredictability.”
