Investor Favorite S&P/ASX 200 - Casting Eye on Australia’s Leading Share Market Index

  • Apr 03, 2020 AEDT
  • Team Kalkine
Investor Favorite S&P/ASX 200 - Casting Eye on Australia’s Leading Share Market Index

Returns on investing in equity comprise of two parts - capital gains and dividends. Both are attractive, aren’t they?

In Australia, which has evolved into becoming a lucrative business and investing region of the Asia Pacific realm over the years, share trading developed from an over the counter (OTC) market to one where trading took place at centralised exchanges in the 19th century. Back in the day, there were two large exchanges in these Australian state capitals, Sydney and Melbourne with several large companies’ shares trading on the exchanges.

The Sydney Stock Exchange had a cumulative market cap that wavered between 20 to 40 per cent of GDP back then (much small relative to today’s stance!). Expansion took place in the 1960s due to resources boom and increase in market cap of listed players. Another expansion was witnessed in the 1980s which pretty much extended up to 2000, majorly driven by privatisations of the Commonwealth Bank of Australia (ASX:CBA) and Telstra Corporation Limited (ASX:TLS), financial institution demutualisation, and an increased supply of capital to the market driven by compulsory superannuation.

Now that we have mentioned 2000, we will cast an eye over a very significant index that came into existence in the year - perhaps the most traded one on the Australian Securities Exchange (ASX) - the S&P/ASX 200 Index.

Let’s dive in!

S&P/ASX 200 Index - An Overview

The S&P/ASX 200 (XJO) is the country’s leading share market index. It comprises of the top 200 ASX listed companies, by way of float-adjusted market capitalisation. Breaking it down further, it consists of the 200 largest ASX listed stocks listed on the ASX (S&P/ASX 100 plus an additional 100 stocks).

It came into existence in 2000, when it replaced the All Ordinaries index to become Australia’s primary investment benchmark, often deemed to be the institutional investible benchmark for Australian equity performance.

INTERESTING FACT! As of March 2020, the S&P/ASX 200 accounts for 81% of the Australian equity market. What does this huge chunk of dominance imply? That the index has some functions to perform-

#1- to provide an accurate benchmark for the stock market as a whole, and

#2- to give institutional investors a highly liquid and tradable index

On this note, it should be further noted that the index is representative, liquid, and tradable and addresses the needs of investment managers to benchmark against a portfolio characterised by sufficient size and liquidity. Moreover, it offers optimum diversification, as it consists of all the 11 GICS available on the ASX (Global Industry Classification Standard). The financial and material sector owns almost half of the index.

Ideally, listed companies under the S&P/ASX 200 range in size from ~$380 million to more than $100 billion.

Understanding S&P/ASX 200 Some More

Listed companies on the index opine that their inclusion in the ASX 200 generates institutional interest, promotes investment and frequently, is a subject of research by stockbroking firms and analysts. Let’s look at some more facts about the index pertaining to its functionality-

  • The constituents of the index are subject to change, depending on the quarterly rebalancing by the index operator Standard & Poor's (S&P). However, in the probable wake of a significant event, an intra-quarter rebalance may be conducted.
  • After the financial and material sector, healthcare and industrials sector dominate the index.
  • The constituents of the index are selected by a committee from S&P and the ASX. They are then ranked in the order of their market capitalisation.

Two Significant Events & Impact on S&P/ASX 200

Investing is probably one of the most dynamic activities around us, vulnerable to various considerations, be it macro or microeconomic factors, global trade relations, climatic conditions or even pandemics - considering how nervous investors have been ever since the novel coronavirus wreaked havoc upon us!

 In this backdrop, let’s cast an eye on how the S&P/ASX 200 has reciprocated for a few events of the past:

The Dot Com Bubble - 2000

Bubbles always burst, they have, and they will, opine experts and share market charts. The dot-com bubble was the result of excessive speculation in internet-associated companies in a period of substantial growth in the consumption and implementation of the internet. During the bubble, the S&P 500 Index chart in March 2000 fell by 50.5 per cent. The tech-heavy NASDAQ 100 fell by 83.5 per cent!

ASX fall was 22 per cent over 12 months. This period marked the mere introduction of the S&P/ASX 200. Luckily, the Australian market escaped much of the dot-com bear market situation as there were relatively less tech and dot-com companies listed on the exchange at the time. The launch of the index was therefore not too impacted, and it went on to become one of the favourites of investors eventually.

The Global Financial Crisis- 2008

An event whose ramifications are felt till date even after a decade of its dire occurrence, the GFC’s existence seems complicated and convoluted. It is believed to have been generated by the US housing market and specifically sub-prime mortgages. With several homeowners defaulting on their loans, the supply for houses went up, but demand fell. This caused property values in the US to decline significantly, and the event turned out to become a global crisis.

In the mid-2007, the ASX 200 was approximately around the 5000 level with experts opining a bear market situation. However, during late 2007, the Australian market (ASX 200) hit an all-time high, topping 6700. In the first trimester of 2008, the index did find a bottom of as low as 3100 points.

When China announced its plans for a massive economic stimulus programme, Australia got lucky (once again!) as commodities prices for iron ore & coal were at historic highs again. Investors were lured into buying a lot of cheap, high-quality stocks, and the market seemed oversold to many.

With 2009 being a good year for the index, a moment did arise wherein investors were once again nervous about debt and the strength of the global economic recovery, as the share market reached its lowest point with ASX 200 at around 3100 again.

However, in the past couple of years, the index has delivered some great highs. We say this because around 2019, the S&P/ASX 200, which has one of the highest yields among global equity price indices, had a dividend yield of approximately 4½ per cent.

ASX 200 Today

Fighting the pandemic, the S&P/ASX 200 settled lower at 5,067.5, down by 1.68 per cent on 3 April 2020. It ended the first quarter of 2020 nearly $500 billion weaker, as the market cap fell to around $1.5 trillion from $2 trillion.

However, a couple of months ago, in February 2020, the S&P/ASX 200 reached an all-time high of over 7199.

With future market performance dependant on the rate of coronavirus infections and deaths around the world, it will be interesting to witness the ASX 200 unfold its stance and garner investor attention, which it has always ended up with.

ALSO READ - The Evolution Of Australia’s Equity Market Over The Past Century

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