Download Lessons from 1969 1969 was a year of low inflation and low interest

Lessons from 1969
1969 was a year of low inflation and low interest rates. Household savings as a percentage
of GDP was around 30 per cent and the total market capitalisation of the Melbourne Stock
Exchange had just exceeded $20 billion dollars. A capital intensive broad-based mining
boom built on coal and iron ore and the emergence of Japan as a key trading partner was
driving Australian growth and the current account deficit.1 As the mining boom dissipated,
however, the subsequent period from the early 1970s was one of declining economic
growth and a slowing economy. At this point it is not difficult to see parallels between the
experience of the economy in the period 1965 to 1975 and in the period post the Global
Financial Crisis (GFC).
Historical data and economic indicators have long been used by economists to forecast
business cycle turning points. In turn, there is a wide range of literature documenting the
performance of stock markets and individual industry sectors through the various stages of
the business cycle. 2 However, a key limitation of research of this nature, when applied in
the Australian context, is the lack of detailed stock market data prior to 1980. This article
utilises new data made available through the ACFS-ANZT Australian Equities Database to
analyse the post 1969 performance of various Australian industry sectors. 3
An analysis of the performance of five key sectors in the Australian economy can be
undertaken in three stages. First, the five largest stocks as measured by market value at the
beginning of January 1965 were selected from the Industrials, Retail and Mining sectors. In
addition, the banking sector was proxied using the three largest banks of the time ANZ, Bank
of New South Wales (Westpac) and National Australia Bank, and for utilities the only
genuine listed utility of the time, AGL, was included. The table below provides a list of the
stocks selected as representative portfolios of industry performance over the period.
Table 1 Industry Group Stock Membership
Mining
Broken Hill
Proprietary (BHP)
Mount Isa Mines
(MIM)
Con Zinc Rio Tinto
(CRA)
North Broken Hill
(NBH)
New Broken Hill
Corporation (NHC)
1
Industrials
ACI International
(ACI)
Commonwealth
Industrial Gases
(CIG)
Blue Metal
Industries (BMI)
Hardie Industries
(HAH)
Humes
(HUM)
Retail
Coles Myer Ltd
(CML)
Woolworths
(WLW)
Banking
Bank of New South
Wales (WBC)
ANZ Banking Group
(ANZ)
Repco
(RCL)
Burns Philp &
Company (BPH)
Grace Bros
Holdings (GRB)
National Australia
Bank (NAB)
Utility
Australian Gas and
Light (AGL)
Mining Booms and the Australian Economy, Ric Battellino, Deputy Governor, address to the Sydney Institute Sydney, (23
February 2010).
2
See for example Momentum, Business Cycle, and Time-varying Expected Returns, Chordia and Shivakumar (2002).
3 The ACFS-ANZT Australian Equities Database has digitised data from 1948 to the present for over 6 000 companies. A
collaborative project between the Australian Centre for Financial Studies, ANZ Trustees and SIRCA.
Many of these companies are still household names today, however some may require
further explanation. Burns Philp & Company was a key player in the food manufacturing
business of which Goodman Fielder was once a subsidiary, Commonwealth Industrial Gases
was one of the first producers of industrial gas and welding products in Australia but in 1994
was acquired by BOC Australia Limited, and ACI international was a major glass packaging
company. Hardie industries needs no introduction, however, it is interesting that the
asbestos saga that first surfaced in the late 1970s, and for which Hardie Industries is
perhaps best known, did not appear to have a significant effect on the company’s share
price. The utilities portfolio is comprised of only one stock because during this period most
utilities were still government owned, with AGL being the exception to the rule.
After building the portfolios of representative stocks, the next step in the analysis was to
measure the cumulative change in market values of each stock over the 1965 to 1970 and
1970 to 1975 periods. A sample of the results of this process for two of the five industries
analysed are shown below:
Table 2 Mining Individual Company Cumulative Changes in Market Value
1965-1970
1970-1975
BHP Billiton
288.99%
-42.25%
MIM
332.96%
-57.80%
CRA
1017.65%
-71.57%
North Broken Hill
146.91%
-40.80%
New Broken Hill Corporation
453.53%
-79.28%
Table 3 Retail Individual Company Cumulative Changes in Market Value
1965-1970
1970-1975
Coles Myer Ltd
-6.37%
41.84%
Woolworths
-9.26%
10.94%
5.59%
16.25%
62.68%
-24.13%
381.88%
33.84%
Repco
Burns Philp & Company
Grace Bros Holdings
It is interesting to note that, the spread of the intra-industry performance of stocks in the
1970-1975 is a lot narrower than that over the entire decade. This is in a large part due to
the exceptional performance of CRA and Grace Brothers over the period 1965-1970. While
not mentioned in the introduction, the performance of BHP and CRA (RIO) over the
preceding five years is another stark similarity between 1969 and today.
Stage two in the analysis was to convert the individual company changes in market value
into a proxy for the entire industry. This was done by calculating an equally weighted
average of the changes in market value of the individual companies in each industry over
the two periods. As an obvious outlier Grace Bros Holdings was removed from the 19651970 calculation. 4 The results of the analysis are shown in the table below:
4
In a similar fashion, if the performance of NAB is removed from the Banking sector, the performance of the
sector was 151.5% and 12.96% respectively
Table 4 Cumulative Change in Industry Market Value over Period5
1965-1970
1970-1975
Banking
90.17%
168.67%
Industrials
30.28%
29.41%
-10.36%
19.57%
Utility
Retail
13.16%
15.75%
Mining
448.01%
-58.34%
The clear talking point from the table above is the striking change in the performance of the
mining sector in the two periods analysed. Mining was by far the best performing sector of
those analysed in the five years leading up to January 1970, however the performance of
the industry then declined with more than half of the market value of companies within this
industry being lost over the subsequent five years.
A similar trend can be seen in the performance of mining stocks as represented by the S&P
ASX 300 Metals & Mining index relative to other industries from the beginning of January
2009 through to mid-September 2012.
Figure 1 Industry Relative Performance 2009-2012
1.9
1.7
S&P/ASX 200 Financial-x-A-REIT
(Sector)
1.5
S & P ASX 300 Metals & Mining
1.3
S&P/ASX 200 Industrials (Sector)
1.1
0.9
S&P/ASX 200 Utilities (Sector)
0.7
0.5
2009
2010
2011
2012
S&P/ASX 200 Consumer Discretionary
(Sector)
Source: Derived from Standard & Poor’s index data (http://www.spindices.com)
While over a much shorter period, the relative performance of the mining sector post-GFC
has clear similarities to the performance of the sector in 1975. As is often the case, this
observation has possibly been made too late for many portfolio managers to tilt their
portfolios away from the mining industry. However this short study does highlight the value
that quality historical data combined with rigorous business cycle analysis can add to the
investment process.
5
The 1965-1970 period measures the cumulative change in market value over the period January 1965
through to December 1969, the 1970-1975 period is measured from January 1970 through to December 1974