Australian Market Could Fall Further on Trump News

Over the past six months, the majority of the workforce has worked from home with a significant number on Job Keeper payments, and according to a report from ASIC, this has resulted in a large influx of new investors and traders into the stock market. When we look at what these new entrants have been buying, it has largely been technology stocks with a big uptake in US tech stocks. But is this a wise choice or are many investors simply following the herd?

Should you be investing in overseas markets?

When talking about technology stocks, invariably most people think of Facebook, Apple, Amazon, Netflix and Google, which are known as FAANG stocks, with many investors holding one or more of these companies. So how do Australian technology companies stack up in comparison to their US counterparts? In Australia, the technology stocks comprise WiseTech Global, Appen, Altium, Afterpay Touch and Xero, which are otherwise known as WAAAX stocks.

You may be surprised to learn that since 1 January to 30 September 2020, FAANG stocks have returned a gross capital gain of 220.21 per cent, while the WAAAX stocks have achieved a return of 264.81 per cent or around 20 per cent better. While this is only a snapshot in time and is in no way conclusive evidence of one market performing better than the other, what it does highlight is the myth that investing in overseas markets can make you more money. Because those new to the market are led to believe that investing in US tech stocks is better than investing in Australian tech stocks. But unfortunately, none of this is true.

The ASX is well regulated and lists some of the world’s best companies; so, while some world markets may outperform our market for short periods, over the long term it not only holds it weight but outperforms nearly all other world markets in terms of return. As the book, Triumph of the Optimists 101 Years of Global Investment Returns released by Princeton University Press nearly 20 years ago and updated in 2018 reveals, the Australian stock market is in the top three best performing markets in the world with the US market much further down the list.

Based on these facts, you have to question why anyone would want to increase their risk to sacrifice better returns by investing overseas rather than in Australia.

What were the best and worst performing sectors last week?

Information Technology was the top performer up 2.5 per cent followed by Communication Services and Consumer Discretionary, which were both down 1.08 per cent and 1.46 per cent respectively. The worst performing sectors included Energy down 6.94 per cent, Utilities down 4.94 per cent and Consumer Staples down 4.88 per cent.

Looking at the ASX top 100 stocks, the best performers included Janus Henderson Group up 16.73 per cent on news Trian Fund Management had taken a stake in the business. Boral was also up 6.76 per cent while Qantas, Flight Centre, Xero and Reliance Worldwide Corporation were all up over 5 per cent last week. The worst performers included The a2 Milk Company, which was down 18.53 per cent after analyst downgraded the stock, followed by Oil Search and Bank Of Queensland, which were down 9.35 per cent and 9.50 per cent respectively.

What's next for the Australian share market?

Despite trading higher early last week, the All Ordinaries Index looked weak, which was confirmed with the market falling over 2 per cent on Wednesday effectively wiping out the gains of the prior four trading days. The Australian stock market also fell 1.42 per cent on Friday following news that President Trump had contracted COVID-19, which resulted in the All Ordinaries Index closing down 2.56 per cent for the week.

Last week I mentioned that it is part of normal market fluctuations for price to move in the opposite direction before continuing the longer-term move and this seemed to be the case last week. Because while the market closed lower, it did confirm an up bar on the charts, given that the market traded higher than the previous week.

While it is possible that the All Ordinaries Index could trade up for another week, it’s more likely that the market will trade down this week as the continuing saga with Trump and COVID-19 plays out in the media. That said, the market is expected to trader lower regardless, as it travels down into the next yearly low, which will occur over the next two to four weeks to below 5,800 points and possibly as low 5,400 points.

The good news is that I expect 2021 to be a much better year for the Australian market with many stocks setting themselves up to present some good buying opportunities.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.