Here’s why the performance of ASX 200 shares is smashing the S&P 500

The S&P/ASX 200 Index (ASX: XJO) materially outperformed the S&P 500 Index (SP: .INX) in the three months to March 2022.

In the first quarter of 2022, the ASX 200 rose by 0.7%. The S&P 500 fell by around 5%. That means the ASX 200 outperformed by almost 6% over the three months.

Why is the ASX 200 outperforming?

The performance of an index is dictated by the underlying holdings.

Not only are the names in the portfolios different, but the sector weights are also markedly different.

The ASX 200 is dominated by banks and resource businesses including BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), Macquarie Group Ltd (ASX: MQG), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Rio Tinto Limited (ASX: RIO), and Fortescue Metals Group Limited (ASX: FMG).

Resource companies have helped deliver outperformance in the first period of 2022.

The Australian Financial Review reported comments from co-head of mining research at UBS Lachlan Shaw explaining why ASX 200 shares are doing well:

Commodities are seen traditionally as a bit of an inflation hedge, and commodity prices are certainly doing their part right now. For now, they are getting a lot of interest from investors in terms of the inflation hedge, in terms of what’s showing up in the headline price.

But if I weigh that against where prices are, the potential windfall cash flow for names like BHP is astonishing. Even if they’re having to give some of that windfall cash back in cost inflation, it’s still an environment where there are strong results and very strong dividends.

BHP is trading on a dividend yield of 11%. That’s exceptionally strong in its own right, but exceptionally strong relative to other parts of the market and other assets in general.

It is also believed that higher interest rates can help bank margins which, in turn, can help ASX 200 bank shares.

Interest rates are expected to increase in both the US and Australia this year.

Why are potential higher interest rates hurting the S&P 500?

The legendary investor Warren Buffett said at the 1994 Berkshire Hathaway annual general meeting:

The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.

The S&P 500 is dominated by global tech names like Amazon, Apple, and Microsoft, which have higher price/earnings ratios (P/E ratios) and more growth expectations built into the valuation. A higher interest rate can mean some investors increase the discount rate they apply to growth shares.

The post Here’s why the performance of ASX 200 shares is smashing the S&P 500 appeared first on The Motley Fool Australia.

More reading

• 5 things to watch on the ASX 200 on Monday
• These were the best performing ASX 200 shares during the first quarter
• These were the worst performing ASX 200 shares during the first quarter
• These were the worst performers on the ASX 200 last week
• What boosted the Whitehaven Coal (ASX:WHC) share price on Friday?

Motley Fool contributor Tristan Harrison owns Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited and Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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