The Australian Centre for Financial Studies (ACFS), in association with ANZ Trustees, has developed an Australian Equities Database (AED) which contains monthly data of all major equity fundamentals. The database presently reaches back to January 1948, with advanced plans to extend back to January 1926 and even possibly to 1900. Both ACFS and ANZ Trustees are now collaborating with Sirca to establish the AED on a web server. The following article is based on data from the AED.

Investors are faced with an enormous volume of data on which to base their investment decisions. Over the past year this pressure has been further increased by the extreme volatility of capital markets and the almost constant updates of (often contradictory) news regarding the global economy. Aside from the distraction of information overload, reflexive investment decision making can lead to sup-optimal returns due to overreaction, herd behaviour and/or representativeness bias. All of which raise the question of how to manage investment decision making – should the investment decision be based on longer term market and economic variables rather than the latest news headline? And if we choose the former, what indicators should we use? This article investigates the relationship of equity returns with two fundamental variables over a period of just over 60 years, 1950 to 2012. The aim of this note is to report on our observations of these variables, interpretation of the results is left to the reader.The first relationship which we review is the correlation between corporate earnings and the AED Price Index (PI). Our proxy for corporate earnings is the Gross Operating Surplus (GOS) of Private Enterprises as reported in the National Accounts. The nominal value of the GOS series has been converted to an index and then compared to the AED Price Index, both standardised to the same base of September 1959 = 100. The comparison between the two series is shown in Figure 1 and the growth by decades in the two measures is outlined in Figure 2.Separate estimates indicate a correlation of 0.978.


Figure 1: Chart of the PI and GOS Indices, Figure 2: Annual Growth Rates by Decade

The figures above suggest an overall strong relationship between reported corporate earnings and the pricing of equities. Thus, a fundamental earnings relationship would seem to underlie the equity returns of a generally efficient market. However, significant variations from the underlying fundamental variable are also visible and these can last for protracted periods. A measure of this divergence is the ratio of the Price Index to the index of published earnings (GOS), as shown in Figure 3. A generally positive bias in the ratio is noted, possibly suggesting behavioural influences similar to those mentioned in the introduction but this is beyond the purpose of this article.


Figure 3: Ratio of the AED PI to the Corporate Earnings Index

As a second review of the apparent relationship between Earnings and Equity Prices, we tested the relationship of the AED Earnings per Share (EpS) series against the AED Price Index series for the same 60 year period. The AED EpS series for the total market is a weighted average of the EpS data presented in the AED tables. As can be seen from Figure 4, there is once again a very high correlation between the two variables.

Figure 4. Comparison of AED Price Index to AED average Market EpS

Figure 4. Comparison of AED Price Index to AED average Market EpS

The aim of this paper is general only, so deeper analysis of these apparent relationships has not been undertaken. However, it would seem clear from these observations that corporate earnings do indeed underlie equity pricing and thereby drive long-term capital appreciation in the stock market.

Figure 5: Comparison of Equity Price and Money Supply Growth, 1950 to 2012

Figure 5: Comparison of Equity Price and Money Supply Growth, 1950 to 2012

In the period commencing in the decade of the 1970s, average money supply growth (at 10.9%pa) has led average Equity capital appreciation (at 8.3%pa) by an average 2.6% pa for the 40+ year period. Establishing a causative relationship between the two variables is complex but the data would seem to suggest that, contrary to popular belief, a high level of growth in the money supply does not necessarily equate to above average returns in the stock market.Over the sixty year period reviewed both variables (Corporate Earnings and Money Supply) have grown at a similar rate to prices in the stock market. Corporate Earnings have been shown to have a much more consistent relationship across this time-period. While the concept of earnings driving stock returns is not a new one, in times of volatility and fear, it can be easy to forget. So rather than focusing on the latest buzz stock metric or the latest shock news headline it may be worth remembering the words Benjamin Graham first wrote in 1949 and remain true today. Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

Appendix: The ANZT-ACFS Australian Equities Database


The Australian Equities Database (AED) is a multi-stage project with the potential to digitise past monthly equity data back to 1926 and possibly 1900. The aim of AED is to fill a large gap in the present provision of digitised Australian equity data which is scarce prior to 1980. The database will provide data on all listed stocks for the period across twenty different variables. The database is being built by the Australian Centre for Financial Studies in collaboration with ANZ Trustees and SIRCA.The Australian Equities database is intended to become a valuable resource for:

  • The evaluation of equities, portfolios and markets
  • Testing the viability of long-term investment strategies
  • Practitioners and academics seeking to conduct research on the characteristics of individual stock and sector behaviours across business cycles and during various macro-economic states.
Figure 1: Snapshot of the Australian Equities Database

Figure 1: Snapshot of the Australian Equities Database


The database is in the development stage with data collection and implementation completed for the period 1948-2002. DevelopmentThe database is currently undergoing improved usability, robustness updates and web access for users. It is expected that the database will provide users with data manipulation, portfolio construction and sector analysis tools. Development is also being undertaken to ensure that the database will also provide historical cash earnings data and price to cash ratios.

Going Live

It is expected that the database will go live for public use by the end of 2013 and will be available via the Sirca website: