CHARTS: Australian stocks vs. emerging markets in 2017

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The ASX200 has struggled to gain traction this year, lagging its global peers across both developed and emerging markets.

One of the main reasons has been the under-performance of the banking sector, which came under pressure amid the Federal Government’s bank levy, concerns around systemic risks in the housing market and allegations of money laundering.

Given that Australian banks make up around 25% of the ASX by market capitalisation, when bank stocks struggle for traction it weighs on the whole index.

Conversely, emerging markets across Asia have benefited from a steady inflow of foreign capital, particularly in the first half of the year.

While those fund inflows have cooled a little in recent months, Asian markets have been a clear standout in 2017.

This chart from Deutsche Bank neatly encapsulates the performance of Aussie stocks against their global peers in US dollar terms:

While a number of Asian markets — including Hong Kong, South Korea and India — have outperformed, the surge in value of stocks from mainland China has been particularly eye-catching.

However, it hasn’t been a great year on either side of the Tasman, with Australian and New Zealand stocks both lagging their DM counterparts in the US and Europe.

Research from Capital Economics in September showed the strong gains on Chinese markets were largely attributable to big Chinese tech stocks.

In June it was announced that shares on mainland China will be included in the MSCI Emerging Markets index from next year, after three failed attempts.

One of the main follow-on effects from their inclusion will be that global investment funds such as Blackrock and Vanguard will hold Chinese stocks as part of their huge passive investment portfolios.

Ahead of this week’s National Congress of the ruling Communist Party, it was perhaps another sign of China’s continued integration into the global economy.

In the case of the ASX200, it now looks comparatively less expensive compared to global peers, according to Deutsche Bank analysts Tim Baker and David Jennings.

“Australia was on the expensive side to start the year, while emerging markets were quite cheap,” the pair said.

“Valuations now look better, but the growth profile isn’t great vs offshore especially outside of resources.”

Baker and Jennings said resources stocks offered the best combination of valuation and growth, while banks looked better valued after losing ground this year but the financial sector’s growth prospects are more limited.

This chart shows how Australian stocks now compare on a forward-looking price/earnings (PE) ratio over the next 12 months:

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