One of the biggest defining market movements of 2014 was the shocking decline in commodity prices1 —especially oil. The Bloomberg Commodity Index lost almost 20% of its value over the year.
Big Moves Create Big Opportunities
Whenever markets are faced with such surprises, the critical question to ask is whether opportunities have been created. When we looked at the performance of global equity markets—specifically those in the developed international space—we saw that one market that tends to be highly leveraged to commodities has tended to lag others over the past few years, a period strongly influenced by central bank activity.2
That market is Australia.
Australia Lags While Other Developed Markets Deliver Strong Returns (12/31/12–3/2/15)
For definitions of terms and Indexes in the chart, visit our glossary.
• Since End of 2012, Developed Market Equities Have Been Strong: Europe—for all its issues—is up nearly 50% cumulatively over this period. The U.S., in nearly a straight upward trend, is up 55%. The impact of Abenomics is quite clear in Japan over this period—up more than 83%.
• Australia Up Only 6.4% Since End of 2012: The performance of Australia—definitely a major developed international market in its own right—has clearly been different. One big reason for this is Australia’s currency, which has depreciated 25.3% cumulatively over this period against the U.S. dollar. Another factor most certainly tied into both Australia’s equity market and currency performance has been the lackluster performance of commodities, since the country is a major global commodity supplier.
What about Valuation?
On a forward price-to-earnings (P/E) ratio basis, Australia trades at about 16.9x, which is less than the United States.4 Australia’s dividend yield5 at the end of 2014 was about 5%—more than twice that of the United States.6 For those more worried about U.S. valuations with markets at or near record highs, it’s possible that Australia could be worth a look. Even the euro area7 relatively high dividend yield over 3% was not a match for Australia’s.
We also looked at the nearly 45 years of available history for the MSCI Australia Index, to place Australia’s dividend yield at the beginning of 2015 into a more appropriate historical context. The median dividend yield to end any year was 3.8%, and 2014 ended, as we said, at nearly 5.1%, placing it eighth out of the 44 available data points.8 Years following dividend yields above the median level, historically speaking, have been associated with higher average returns than years following dividend yields below the median level. Of course, there is no way to know what future returns could be, but it is an interesting way to look at where Australia ended 2014 relative to its own historical context.