Gold and mid-caps lead the market higher

Co-founder of the Switzer Report
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It’s been hard to ascertain what’s been driving the market lately but a closer analysis reveals that mid-cap stocks are leading the market higher. Since the start of 2014, the S&P/ASX 200 is up by 2.06%  (3.25% if dividends are included), closing on Friday at 5462.3.  Over this same period, mid-caps are up by a staggering 6.06%.

The following table shows the performances of the major indices from 1 January 2014 through to the close on Friday. The top 20 stocks are lagging the overall market, being up on average by 1.11%.  At the other end, the micro-caps are broadly on par with the market, with the S&P/ASX 300 performing in line with the S&P/ASX 200.

Mid-caps stocks are classified as the smallest 50 companies in the ASX 100 in terms of index market capitalisation. Winners in the mid cap space since January include Aurora Oil & Gas (up 38.1%), Seek (up 36.1%), Leighton Holdings (up 28.6%), OzMinerals (up 24.4%), Boral (up 22.0%), Beach Energy (up 20.3%), Adelaide Brighton (up 18.5%), James Hardie (up 18.2%), Navitas (up 18.0%), Carsales.Com (up 16.7%) and Flight Centre (up 15.2%).

Sectors

All of the main GICS sectors are showing positive returns (see table below), with the exception of the telecommunications sector. This is largely a result of the performance of Telstra (which dominates this sector), which is down 3.4% since January. However, when the dividend of 14.5 cents is added back in, the performance is close to flat (as shown by the accumulation index).

The smallest sector, information technology, which only accounts for 0.9% of the overall index, is the standout – up 9.24% since the start of the year. Computershare (CPU) and Carsales.com are the main stocks in this index.

And putting gold stocks to one side (the gold index is up a massive 36.3%), what are the main themes to emerge? Well, we are not quite seeing a repeat of 2013 or, for that matter, the foreshadowed sector rotation that many experts predicted, however the early trends appear to be:

  • Cyclical sectors are performing more strongly (consumer discretionary, industrials);
  • The resource sectors (excluding gold stocks and energy) are lagging;
  • Two of the major yield sectors (financials and consumer staples) are lagging, although when dividends are added back in, the difference is relatively small. Two of the others (utilities and property trusts) are performing better than the market, although these two sectors were amongst the laggards of 2013.

Index changes negative for some stocks

On Friday, S&P Dow Jones announced its quarterly rebalance of the S&P/ASX indices, which will take effect after the close of trading on 21 Friday March. While some of these changes really don’t mean that much (whether a stock is in the ‘top 20’ or the ‘top 50’ is more about ego than anything else), they can be quite material when the index is one of the benchmarks used by major fund managers.

For example, many index funds (including ETFs) base their performance on the S&P/ASX 200  – so if a stock drops in or out of this index, this can cause new buying demand or selling pressure as these style of funds adjust their holdings. Additionally, broker analysts and others typically only follow the major stocks – so dropping out of an index will sometimes result in reduced analyst coverage and over time, reduced institutional interest.

These are the changes due to take effect.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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