Why are international shares outperforming local shares?

All asset classes within your superannuation fund are subject to fluctuations.

After several years of strong performance by Australian domestic shares, international shares are starting to provide stronger returns.

Chris Sozou, Virgin Money Australia’s General Manager Wealth & Insurance outlines some of the reasons for this reversal, namely:

  • Australian shares have been highly sought after because of our performance during the GFC. But with other countries now recovering, growth in their markets is providing strong investment opportunities
  • China’s growth is slowing, reducing demand for our resource sector
  • Resources and finance sectors make-up over 60% of the Australian market, but these sectors are not performing as strongly as other sectors
  • The outlook for major economies is improving, giving rise to the expectation of rising interest rates

Read the full transcript: Why are international shares outperforming local shares?

“International shares have outperformed Australian shares over the last couple of years due to several inter-related factors.

Firstly, Australia earned a lot of investor attention because of our performance through the GFC, relative to other countries.  This is mainly attributable to

  • the commodities boom
  • low government debt, and
  • a sound banking system

Which led to overseas investors going overweight in Australian shares versus other global share markets.  This trend has more recently reversed as major economies such as the USA, Germany and the UK start to recover post GFC and their respective share markets, on a relative basis, are perceived to offer better value.

Secondly, a major factor in the Australian share market growth over the last 5 years has been China‘s growth and their subsequent appetite for Australian resources.  The Chinese economy was growing in excess of 11% and it is now forecast to grow at sub 7%.  This slowdown has reduced Chinese demand for resources and resulted in falling commodity prices, meaning that Australian resource companies and the broader Australian share market have lost some of its attractiveness relative to international share markets.

Thirdly, resource and financial sectors collectively make up 60% of the Australian share market, meaning less representation in currently popular investor themes of Technology and Consumer stocks.

Finally, in this low interest rate environment, Australian companies that pay high dividends with imputation credits have proved to be very attractive for both domestic and international investors. However with the outlook for the major economies improving there is an expectation that rising interest rates are just around the corner, lifting demand for the US dollar and US shares.”