Australia has the reputation of being the lucky country. The Australian share market has a similar reputation, with the benchmark Australian S&P/ASX200 share index generating an almost 10% per annum compound return in the 25 years from May 2000 to May 2025. But is the Australian share market lucky, or is it resilient with a framework that provides the basis for these attractive compound returns through economic and investment cycles?
Diverse economy supporting Australian share market
The annual Macquarie Australia Conference held in early May 2025 saw 120 Australian and New Zealand companies present in Sydney to 1200 conference participants. Investors were nervous that companies would use the conference to cut profit guidance due to proposed US tariff impacts on demand and costs. While there was the rare earnings downgrade, the outcome of company updates was much better than expected.
Company management were watching the impact of tariffs on the US economy but were more focused on the impact of tariff changes on the Chinese and Asian economies. Some businesses talked about delaying major investment decisions pending clarity around the impact of tariff changes but also noted that robust underlying demand meant they would need to get back to investing, but with higher awareness of geopolitical risk.
Reinstatement of the Labor Federal Government was seen as positive by companies in terms of providing a ‘known known’ policy framework. Company management talked about Australian consumers being value conscious with household disposable income under pressure from higher mortgage rates. They also talked about resource constraints in Brisbane and Sydney given major infrastructure programmes, and that Melbourne was showing signs of recovery supported by positive migration and improved housing affordability.
Perhaps one of the reasons behind the relative confidence of companies is that the Australian composite Purchasing Manager Index (PMI’s), a useful lead indicator of future Australian economic activity, remains above 50 suggesting the Australian economy will continue to expand (figure 1). In fact, the Australian PMI has consistently been in positive territory over the last 25 years. Australia’s diverse economic growth engines including mining expansion, population growth, infrastructure development, and a growing technology sector, mean that when one growth engine slows others have picked up providing a consistent economic environment that has supported business earnings and confidence.
Figure 1: PMI’s suggest Australian economic growth to continue
After completing more than 50 one-on-one meetings with companies during the conference, the Harbour Asset Management research team came away reminded about the diversity of the Australian economy and share market.
Changing Australian share market mix supports returns?
The industry sector composition of the Australian share market has moved away from being 80% mining and energy shares in the 1980’s to being far more diverse. Today Australian mining and energy companies make up approximately 22% of the Australian S&P/ASX200 benchmark share index by market capitalisation, financials (dominated by banks) make up 33.8%, and healthcare makes up 9.4% of the benchmark. In 2006 growth companies made up just over 20% of the Australian share market - in 2024 they make up approximately 35% of the market.
Figure 2: Australian share market sector weighting 1973 to 2024
This long-term change in industry sector composition may have contributed to the last 25 years of solid equity returns. Mining and energy shares tend to be capital heavy with large asset bases increasing their sensitivity to economic cycles. Non-mining/energy companies have tended to be less capital intensive and are more cash generative, which in turn has improved the quality of the Australian market. Offshore expansion has been an important component of the Australian share markets growth migration. Offshore expansion potentially increases the addressable market and profitability of scalable business models with good governance.
We also observe an improvement in the underlying business models of more traditional Australian share market industry sectors over the last 25 years. The large miners (Rio Tinto and BHP) have shown better capital discipline, and less earnings cyclicality, compared to history. Real estate investment trusts have moved towards an asset management model, with more capital light, higher returning structures. The large Australian banks have reduced their capital intensity by reducing their branch networks and changing their lending practices to reduce the risk of owning commercial property portfolios. And retailers are better at managing inventory cycles, contributing to more consistent positive returns.
The change in Australian share market sectoral mix and improvement in underlying business models may have supported returns over the last 25 years, but the markets ongoing evolution, particularly the pivot towards growth-focused and more offshore earnings companies, may continue to translate to continued solid long-term returns for investors.
Aussie super supporting super returns?
Australia’s natural resources and supportive long term migration policies have driven its economic growth through time. But one resource that is possibly underestimated is Australia’s significant and growing superannuation (pension) wealth pool. The Australian superannuation system grew by over 9% in 2024 to A$4.14 trillion. According to a report by JP Morgan, the Australian superannuation system is growing at nearly A$1bn per day, A$88bn in the last quarter, an annualised rate of over A$352bn. This represents 135% of the current S&P/ASX200 market capitalisation and 152% of Australian Gross Domestic Product. The average Australian household pension balance stands at A$366k, which is 8% higher year on year.
With the Australian superannuation contribution increasing to 12% in July 2025, total Australian pension assets are set to climb close to A$4.5trn in 2025. This growing pool of capital may be supportive for Australian share market returns, providing demand for investments reducing the risk of a sustained period of significant negative returns.
Lucky and resilient
Australia may be the lucky country, blessed with natural resources and population growth. But rather than being lucky the composition of the Australian share market may make it resilient to economic ups and downs, providing a foundation for historical attractive compound returns and potentially future returns. Whether the Australian share market is lucky, resilient, or both it may continue to provide useful investment opportunities for New Zealand investors.
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This publication is provided for general information purposes only. The information provided is not intended to be financial advice. The information provided is given in good faith and has been prepared from sources believed to be accurate and complete as at the date of issue, but such information may be subject to change. Past performance is not indicative of future results and no representation is made regarding future performance of the Funds. No person guarantees the performance of any funds managed by Harbour Asset Management Limited.
Harbour Asset Management Limited (Harbour) is the issuer of the Harbour Investment Funds. A copy of the Product Disclosure Statement is available at https://www.harbourasset.co.nz/our-funds/investor-documents/. Harbour is also the issuer of Hunter Investment Funds (Hunter). A copy of the relevant Product Disclosure Statement is available at https://hunterinvestments.co.nz/resources/. Please find our quarterly Fund updates, which contain returns and total fees during the previous year on those Harbour and Hunter websites. Harbour also manages wholesale unit trusts. To invest as a wholesale investor, investors must fit the criteria as set out in the Financial Markets Conduct Act 2013.