Buckle up, investors! ASX shares are going to leave foreign stocks in the dust.
That's the analysis from AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver, who forecasts Australian equities will go gangbusters over the next decade.
"The period of underperformance in Australian shares compared to global shares since 2009 is likely to be over," Oliver said on the AMP blog.
"Expect a five to 10-year period of trend outperformance, albeit there will be bumps along the way."
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Why ASX shares have struggled the past 13 years
Australian shares have not gone as well as their international peers in the period since 2009, in the aftermath of the global financial crisis.
Oliver reckons there was some mean reversion going on after ASX stocks rocketed up in the 2000s from the commodities boom.
"The slump in commodity prices from 2011 – this weighed heavily on Australian resources shares through much of last decade," he said.
"Foreign investor fear of a crash in Australia's expensive housing market has been a periodic theme over the last decade leading many foreign investors to be cautious of Australia."
The deterioration in the western world's relationship with China has suppressed Australian shares too.
"This started in 2018 with [former US] president Trump's trade war but was accentuated through the pandemic," said Oliver.
"It arguably resulted in foreign investors demanding a risk premium to invest in the Australian dollar and Australian shares."
Towards the end of the period, the ASX's lower exposure to COVID-19 pandemic winners — like technology — was also a drag on its performance.
Why ASX shares will rocket the next few years
But heading into 2023, Oliver feels like the tables have turned.
"The commodity price slump from their 2008-2011 highs looks to be over," he said.
"Commodities [are] embarking on a new super cycle bull market driven by constrained supply after low levels of investment and low inventories for most commodities, decarbonisation driving increased demand for metals and increased defence spending on the back of increased geopolitical tensions which is metal intensive."
The resources sector's domination of the ASX will see the local bourse cash in from these new conditions.
"The risk of a sharp deterioration in the trade relationship with China appears to be receding — at least for a while — helped by a change of government in Australia."
Australian shares are also starting out cheaper, after a decade of underperformance.
"Australian shares are trading on a lower forward price-to-earnings multiple of 14.5 times than global shares on 15.3 times & US shares on 17.1 times," said Oliver.
"Australian shares are due for a lengthy period of outperformance."
Oliver added that the high dividends paid out by Aussie companies would drive higher returns over the coming years.
"Australian shares pay a higher dividend yield than traditional global shares: 4.4% versus 2.5%. This is important because dividend payments are a big chunk of the return an investor will get and so the higher the better," he said.
"Franking credits add around 1.3% per annum to the post tax return for Australia-based investors."
