The ASX markets itself as 'cheap' and 'high yield' when in reality it's neither. It's a concentrated bet on three domestic oligopolies that can't reinvest incremental capital at high rates of return, wrapped in a tax gimmick, trading at laughable prices.
First of all, the P/E trap. A low P/E does not mean it is cheap/higher returns are expected.
A 12x P/E on a cyclical business at peak earnings is expensive. A 21x P/E on a business compounding earnings at 20%+ with high ROIC is cheap. A lot of people just think 'oh the P/E number is lower so it's a much safer investment' without having a think about why the P/E is low in the first place.
Conversely, CBA trades at a 22x P/E multiple for a business that's expected to grow 1 to 3% in 2028. That is an incredibly expensive stock that makes up almost 10% of the ASX vs. for instance, a US fast-grower stock at 50x earnings but is expected to double earnings in the next two years. You are paying NVIDIA level multiples for something that is barely going to grow.
2. You don't own Australia. You own 3 oligopolies.
The ASX 200 is not a diversified economy. I see people saying 'but but but, ASX gives me diversification!!!
It's: Banks + Miners + Supermarkets.
If you look at just the big four banks and the big miners plus Woodside, they represent a staggering 34% of the ASX 200. In fact the two miners and 5 major banks account for approximately 36%. Other cuts put banks and miners at 50% of the index. Most portfolios benchmarked to the ASX 200 have around 25% in big four banks because that is their representation, 10% is BHP alone.
a) Banks: Cyclical lenders trading as the most expensive banks in the developed world on 12-month forward P/E and price-to-book. Their earnings are a function of one thing: Australian house prices.
Homes are now worth more than 10 times average income, a ratio that has more than doubled since the mid-1980s. Mortgage repayments now represent 35.5% of average household incomes – the highest since 1989. 95% variable rate mortgages. The bank doesn't create value, it rides a credit cycle that you pray to Buddha every night that it won't revert to the mean.
b) Miners: Price takers. BHP and Rio dropped 19% and 12% in 2024and took the index with them. They have no pricing power, no incremental ROIC at the bottom of the cycle, and when they do make money they drill it into the ground at the top.
c) Supermarkets: Woolworths and Coles accounting for around 70% market share combined. It's an oligopoly. Consensus is forecasting ∼5% EBIT margins for Woolies and Coles vs ∼3% for leading US chains. Trading on forward P/E multiples of 24 and 22x respectively, double the 11x average for larger chains Kroger, Albertsons and Ahold.
You are buying two grocery stores at double the multiple of the US for the same box of Weet-Bix.
3. The franking credit factory
The whole market is designed to pay you back your own capital and call it yield.
Franking credits added around 2% to ASX 200 returns. It's estimated historically franking adds around 2% p.a. to the return, which is 22% of the total return from 2011 to 2021. More than half of the ASX 200's historical returns over the past two decades have come from dividends.
The problem: A dividend is not free. In Australia, a company that can't reinvest at high returns pays it out, you get the franking credit, then you pay your marginal tax rate on it. You have converted what should be compounding inside a business into taxable income.
I think Morningstar put it best: "I worry that many Australian investors are overvaluing franking credits. And this is causing those investors to ignore global shares which may have better prospects for dividend growth and share price growth."
You own Telstra, banks, and BHP for yield. They grow earnings at 0-4% if you're lucky. You pay 30-47% tax on the dividend. How much is the real growth? Zeeeerrooooo.
4. Where are the compounders? Almost nowhere.
Do the exercise: How many ASX 200 businesses earn high ROE, high ROIC, and have high returns on incremental capital?
In the US, it's hundreds. On the ASX, you can count them on two hands: CSL, REA, Pro Medicus, Wisetech (when it's not imploding), Altium, maybe Goodman.
The rest?
Banks: ROE 12.5% is high by international standards but it's leveraged 10:1. ROIC is terrible. They cannot redeploy $10bn into a new product at 30% returns. They write more mortgages.
Miners: ROIC is violently cyclical. 40% at the top, 2% at the bottom. No reinvestment moat.
Supermarkets: High ROE from property and duopoly pricing, but where do they reinvest $1bn at high returns? A new store? That's 8% ROIC.
The market even tells you this: Companies in the S&P 500 and NASDAQ-100 have historically compounded earnings faster than the typical Australian blue-chip. By contrast, the ASX 200 leans heavily toward banks, miners, energy, and infrastructure, industries that produce significant cash flow and often return large portions to shareholders.
And when you do get tech on the ASX: While the ASX 200 is up around 5% year to date, the S&P ASX All Tech Index – the closest thing Australia has to the Nasdaq is down around 12%. We import US innovation, we export iron ore.
5. The real return after inflation is the punchline.
Everyone quotes "ASX returned 13.2% since 1900." That includes two world wars and a century where Australia was an emerging market.
Look at what matters:
10 years to 2015: ASX 200 price return about 10% over 10 years, or 1% p.a.. Average inflation 2.7% p.a. over that time. You lost money in real terms before dividends.
20 years to April 2025: S&P 500 delivered 7.53% return after inflation. ASX 200 provided 5.13%.
Last decade: ASX 200 delivered average annual returns of 7% to 9% total including dividends. Half of that is dividends you pay tax on. Strip out franking and inflation (3%+ average), you're left with 2-3% real, taxable, with 100% equity volatility. That's a term deposit with drawdowns.
The ASX All Tech is supposed to be your growth engine and it can't even beat inflation in 2025.
6. Indexes are just the businesses inside them
This is the point people forget. An ETF is performs based on the assets inside it. A stock is a representation of an underlying business.
If the businesses inside can't reinvest at high rates, the index can't compound. The US index compounds because it contains businesses that can take $10bn and turn it into $20bn of value at 40% ROIC (Google, Meta, Microsoft). Even if you buy these businesses at high prices; if you hold them for an extremely long time and add more when they dip, you get one hell of a result.
The ASX index "returns" capital because the businesses inside have nowhere to put it. That's not shareholder-friendly or responsible stewardship of capital. These are companies basically saying 'we have no idea what to do with the capital'.
Add to that: brain drain, founder-led companies list in the US (Atlassian, Canva), super funds forced buyers of banks due to benchmark hugging, and a currency that devalues whenever China sneezes.
You are not buying "the Australian economy." The Australian economy is houses, cafes, and government spending. You are buying a leveraged housing fund, two holes in the ground, and two supermarkets charging you $6 for lettuce, at 28x earnings.
7. Fish where the fish are
This is the part Australians never want to hear because of home bias and franking credits.
Your money doesn't care about your postcode. It doesn't care about the flag on the HQ. Your money only cares about one thing: is the underlying business compounding its earnings and return on capital?
The ASX is about 2% of global market cap. The MSCI World Index alone captures large and mid cap representation across 23 Developed Markets. That is the ocean.
Why are you fishing in your bathtub when the ocean is right there?
If the best business in the world that does what you need is in South Korea, you go to South Korea. If it's in Japan, you go to Japan. If it's in Turkey, you go to Turkey. If it's in the US, you go to the US.
You want the best semiconductor foundry? It's not on the ASX. You want the best auto manufacturer, the best luxury house, the best medical device company, the best software platform that can reinvest every dollar at 40% ROIC for a decade? None of them are on the ASX.
Patriotism is NOT a strategy. BHP doesn't grow faster because you live in Perth. CBA doesn't compound at 20% because you have an offset account.
You invest your money where the best businesses are. Period. And when the best businesses grow - really grow, with high incremental returns on capital, pricing power, and secular tailwinds - your money grows with them in the long term. That's how indexes work. The S&P and Nasdaq crushed the ASX for 20 years not because America is magic, but because they contained the businesses that actually compounded.
The ASX contains businesses that pay you to go away because they have nothing better to do with the cash.
Go where the fish are.
