November 2003
Statement on Monetary Policy
Box B: Comparing Australian and US Equity
Returns
Since 1997, equity prices in both Australia
and the US have risen by around 40 per cent
(Graph B1). Movements in equity prices,
however, provide only a partial measure of
returns; a comparison of total returns
requires also that dividends be taken into
account. From the point of view of someone
investing in both markets, exchange rate
movements also need to be taken into
account. This box attempts to quantify these
considerations.
Graph B1
Australian and US Indices
End December 1996 = 100
Index
Index
Share prices
200
Aside from movements in share prices,
investors also receive returns in the form of
dividends. Indices of the total returns on
equities, known as ‘accumulation indices’,
are calculated by taking account of
dividends. Since 1997, dividend yields on the
ASX 200 have averaged 3.6 per cent. On the
S&P 500 they have averaged 1.5 per cent,
with yields falling to around 1 per cent
around the time of the peak in US share
prices in 2000. Because of the higher
dividend returns in Australia, the ASX 200
accumulation index has outperformed the
S&P 500 accumulation index by
15 percentage
points
since 1997
(Graph B2).1
Graph B2
200
S&P 500
150
Australian and US Indices
150
End December 1996 = 100
Index
Index
Total returns in local currency
ASX 200
100
100
200
200
S&P 500
50
50
150
0
l
1997
l
1998
l
1999
l
2000
l
2001
l
2002
2003
150
ASX 200
0
100
100
Source: Bloomberg
50
Price indices measure the capital gain or
loss from holding a portfolio of shares. In
the period to 2000, US share prices rose
much more strongly than those in Australia;
at their peak they were about double their
level in 1997, whereas in Australia the peak
level was one and a half times the 1997 level.
Over the subsequent three years, however,
US share prices fell sharply and the net
increase since 1997 is now about the same
in both countries.
0
50
l
1997
l
1998
l
1999
l
2000
l
2001
l
2002
2003
Exchange rate changes between the
Australian dollar and US dollar have broadly
offset this gap. Assuming that investors did
not hedge their exchange rate risk, the
Australian dollar value of their US
investments can be calculated by converting
1. These calculations do not take into account the various taxes on such investments in the two countries.
40
0
Source: Bloomberg
Reserve Bank of Australia
the US accumulation index into Australian
dollars at the prevailing exchange rate. Doing
so suggests that investing in the domestic
share market was broadly similar to investing
overseas over this period (Graph B3).
Finally, comparisons of equity markets’
performance should also take account of
differences in risk. Due to the lower price
volatility of the Australian market during the
past seven years, whether measured on localcurrency or common-currency terms, the
Australian market has outperformed the US
market on a risk-adjusted basis. R
November 2003
Graph B3
Australian and US Indices
End December 1996 = 100
Index
Index
Total returns in Australian dollars
300
300
S&P 500
200
200
ASX 200
100
100
l
0
1997
l
1998
l
1999
l
2000
l
2001
l
2002
2003
0
Sources: Bloomberg; RBA
41