Despite returning 11.8% over the year to July, some investment managers are now trimming their holdings in Australian shares. This shift is driven by stronger performance in global equity markets, especially in the US, and signals challenges within the local market that may restrict future returns.
The Australian share market has delivered annualised returns of more than 12% over both three and five years. However, the MSCI All Countries World Index excluding Australia has outpaced this, returning 17.49% over one year and more than 19% over three years, largely due to its heavy US weighting. With tech stocks comprising just 4% of the ASX 200 compared to 34% of the US S&P 500, the structure of the Australian market seems less suited to the modern, growth-driven digital economy.
Projections suggest gains will remain limited. Capital Economics expects the ASX 200 to stay close to 9000 points through to 2027, while the US S&P 500 is forecast to rise from 6439 to 7500 during the same period. This outlook is encouraging both companies and investors to look beyond domestic borders.
One key driver of global outperformance is structural. The Australian market is dominated by financials and materials, which together represent about 60% of the ASX 200. Among these, the banking sector has been a major contributor, with a leading institution accounting for roughly 40% of index gains so far in 2025. Yet even this strong performer would require a significant price correction to match international valuation norms.
Australia's emphasis on dividend yield and franking credits caters well to income-focused investors but limits long-term growth potential. The US market, in contrast, encourages reinvestment of profits and prioritises capital appreciation. This has allowed companies such as Berkshire Hathaway to reinvest earnings and produce sustained returns without the need to pay dividends, drawing in younger investors who are more focused on growth.
Further concerns lie in productivity. Australian GDP growth trails other advanced economies, and local businesses face challenges from regulatory complexity, high energy costs, and government spending that is nearing 27% of GDP. Although smaller companies may benefit from lower interest rates due to their high exposure to variable debt, many of the most promising opportunities are now found among ASX-listed businesses with significant offshore earnings or in underserved industries like technology and utilities.
Australian equities appear set for a period of subdued momentum. While selective investing and rotation within the ASX 200 may still yield returns, greater global exposure is likely to offer stronger growth in the years ahead.
