During March, the ASX dropped about 4.8%, or 4.3% when adding back dividends. The conversation has moved from inflation and interest rate rises, to banking liquidity and confidence in the financial system. Interestingly, whilst the banking issues have been limited to the US and Europe, the share markets in these regions have risen. A reason for this is the sector exposure of the different indices.

The Australian market is heavily exposed to Financials (28%) and Resources (24%). BHP alone accounts for 10.5% of the index. Resources have been very volatile this month.

The US market has only a 12% exposure to Financials, with Information Technology accounting for 27% of the S&P 500 index. Apple Inc (6.6%) and Microsoft (5.6%) are by far the largest companies in the S&P 500.

Although the Australian market is far more concentrated than many global peers, the performance has been best-in-class over the past 123 years, according to a Credit Suisse research note. The ASX has returned annualised real returns (above inflation) of 6.43% since 1900 in US dollar terms. In local currency terms, the ASX is the second-best performing market over this period (South Africa first). The US returned 6.38%. The resources sector has driven this growth, with Australia being the world’s largest exporter of coal, iron ore, lead, rutile and zinc and the second-largest exporter of gold and uranium.

While past performance is not a predictor for future returns, a globally diversified portfolio with a domestic bias appears to be a reasonable strategy.

Alex Leyland

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