‘Old-world’ stocks gave the ASX an edge this year. Can it continue?

This year has been tough for equity investors as the era of ultra-cheap money came to a sudden end, but Australia’s share market has still performed better than most over 2022.

Indeed, as Christmas approaches, the ASX 200 is down a relatively modest 3.5 per cent, which is far better than the 15 per cent decline in the MSCI World Index, or the 17.5 per cent slide in US shares.

Resources stocks have helped the ASX perform better than many overseas markets this year.Credit:Getty Images

But can the Aussie market continue to outperform the world? It’s a question that’s worth exploring, especially since investing in overseas shares – particularly US tech shares – has become more popular in the last few years.

A key reason why Australia’s market outperformed this year has been its skew towards “old world” companies such as natural resources giants and banks, and its relative lack of trendy technology businesses.

While the US market features world-leading tech giants, our biggest companies are mostly mining giants and banks. A Reserve Bank submission last year supported this old-world flavour by pointing out that the average ASX-listed company was more than 100 years old, compared with 82 in the US and 77 in Japan.

The industry composition of the ASX led to it underperforming other markets during much of the past decade, when the stars of sharemarket investing were US tech giants such as Apple, Google’s parent Alphabet, Amazon, Netflix and Facebook’s owner, Meta.

Ultra-low interest rates boosted the share prices of these and other “growth” businesses because, when bond yields were extremely low, investors were prepared to take on more risk for expected profit growth that was forecast in the future.

But as rates have risen sharply, the ASX has made a comeback. Sky-high technology valuations have imploded, as investors put more emphasis on earnings that are being produced now. The tech-based NASDAQ index has plunged almost 30 per cent so far this year.

At the same time, natural resources firms are in demand due to sharply higher commodity prices, especially in the oil and gas sector, after the war in Ukraine sent energy prices soaring.

AMP Capital’s chief economist Shane Oliver says the ASX has gone through periods where it’s lagged the world (the 2010s, for example), but this year its skew to miners has served it well.

“We don’t have the tech stocks, but we’re loaded up with resources stocks, and resources stocks provide some hedge against high inflation. But more importantly, they were relative beneficiaries of the war in Ukraine,” he says.

Whether that outperformance can continue is up for debate.

Those on the more bullish side, such as Oliver, think energy prices will be kept high by the war in Ukraine, and China’s move away from its strict COVID-zero policies should support commodity prices.

Prominent hedge fund investor Phil King, of Regal Funds Management, has predicted a “multi-year bull market” in many mining and energy stocks, citing factors including strong demand for metals as the world seeks to electrify.

Ultra-low interest rates boosted the share prices of Google and other “growth” businesses.Credit:Domino Postiglione

If relatively high inflation persists, as some economists believe it will, that could also be good news for commodity producers, which end to benefit when input prices are rising.

Not everyone is so bullish, of course. Many experts think the United States and Europe could drag the world economy into recession next year, which could create a challenging backdrop for commodity exporters.

There’s also little doubt that 2023 will be a much weaker year for the domestic economy, as highly indebted households feel the sting of higher interest rates. Falling house prices could also create tougher conditions for the major banks, retailers and other consumer-facing businesses.

For retail investors, the key long-term point is that the mining-heavy ASX goes through periods where it outperforms other markets and periods where it lags.

Given this, it can be worth spreading a share portfolio across different industries and geographies, and not betting too heavily on the latest trends, such as tech booms.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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‘Old-world’ stocks gave the ASX an edge this year. Can it continue?

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