Rudi's View | Sep 11 2008
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck, Editor FNArena
There’s no such thing as a watertight guarantee when it comes to investing in the share market, but my analysis of historical data suggests investors can possibly look forward to some positive developments, once we have left the historically weak September-October period behind us.
Before I continue: a small introduction.
I believe in cycles. I am convinced that life never moves in straight lines, and neither do financial markets. I also believe that throughout these cycles nature tends to balance things out over the longer term. This is, in essence, why we have bear markets. Nature needs them to balance out the good and buoyant times.
I spent a good part of the last weekend trailing through and analysing historical data. At first the exercise made me quite depressed (I’ll get to this later), but I was soon reminded there are many ways to look at the same set of data. In the end, I believe, I may just have discovered a positive outlook for the Australian share market in the months ahead.
Let’s start with the depressing news: investors have enjoyed four exceptionally good years in terms of overall share market performance between 2004-2007. On the basis of data generated by BT Investments the financial years (ending in June each calendar year) throughout this period generated total returns (asset appreciation plus dividends) of 22.4%, 24.7%, 24.2% and 30.3% respectively.
Why was this so depressing during my initial analysis?
Well, if you accept that share market performances balance out somewhere around 10% in the long run, then nature still has one hell of a task ahead of itself. The average return for the Australian share market over the last 21 years up until the end of June 2008 is 10.4%. However, those four years plus fiscal 2007 (which generated a negative 12.1% return) amount to an average return per annum of 17.90%. That is significantly lower than the average of 25.40% for the four years between 2004-2007, but still significantly above the long term “mean”.
Long story cut short: to balance out the exceptional returns of 2004-07 in a minimum of time it would take two more years similar to FY08. Not exactly something to look forward to, especially not since FY08 has proven to be the worst of all 21 years since 1988.
However, I also discovered the Australian share market tends not to generate more than two years of negative returns in succession. An investment return overview by BT Investments dating back to 1960, per calendar year (as opposed to financial year), suggests one year of negative returns seems to be the norm in order to balance things out. Two negative years in succession is the extreem exception of which we had one experience already earlier in the decade.
How does this fit in with our premise that those exceptional returns between 2004-2007 will need to be compensated for?
You probably understand now why my initial mood was not very upbeat on Sunday.
I think I found the solution by taking a wider perspective. I reasoned those four exceptional years don’t simply stand on their own. They are as much a result of the years that preceded them just as the following years will be influenced by last year and the four years prior.
This makes sense, as the three years prior to fiscal 2004 generated two negative years (the previous bear market) and one with a below average performance for an average annual return of only 1.1% over the full three year period. In my view all this starts making more sense now. Also, I discovered the three years from 1988-1990 also proved very weak, with a total return of minus 0.9% for the period. Not only did overall returns pick up significantly in the following years, the subsequent decade did not generate one year without a positive return.
If we cut history in decades then the years between 2000 and 2008 have generated an average total return of 11.82%, still above average, but no longer significantly so. I discovered small variations on the theme only generate small differences. If we go back ten years in history (1998-2008) the average return is 11.20%. If we take the past eight years (2001-2008) the average return is 11.58%.
Moreover, the average return between 1990-1999 is 11.67%. If I combine the previous decade with the past nine years the average becomes 11%.
Remember the average return since 1988 (past 21 years) is 10.4%.
In other words, no matter how much I play around with these data, it would appear that the overall conclusion is that a rather flat year, maybe one that generates below average returns, will bring this share market back in synch with its longer term performance average.
And the news gets even better. So far, the current financial year has seen the ASX/S&P200 index generate another negative performance to the tune of minus 4.5% (as at Tuesday). According to my calculations, when I combine the past 19 years, and throw in one year of no net return (which is pretty much where we are right now if you add your prospective dividends) the total average return over the past twenty years will fall to 10.45%.
Are you thinking the same thing as I am right now?
It would appear the Australian share market has now given back enough to make up for the exceptional performances between 2004 and 2007. I know this doesn’t imply that share prices cannot fall further in the weeks, or even months ahead, but it does raise interesting thoughts and potential scenarios for the 9.5 months in front of us. Don’t you agree?
For those who want to check all of the above, or play around themselves, here are the share market performances over the past nine years (source: BT Investments):
2000 – 13.7%; 2001 – 8.8%; 2002 – (4.5%); 2003 – (1.1%); 2004 – 22.4%; 2005 – 24.7%; 2006 – 24.2%; 2007 – 30.3%; 2008 – (12.1)
(Between brackets signals a negative return). Have fun!
