If you think ‘Euromess’ is going to get a lot, lot worse before it gets better, then our equities sector views are probably not for you. If on the other hand, like us, you think that Asian growth and a recovering US economy will make up for a recessed Europe, then you may wish to weight your fund’s share portfolio as we suggest below.
Our guidance is cautionary due to the fact that our sector analysis depends so much on the outlook for commodity prices and the direction of the Australian dollar – which in the short term are being driven by events in Europe.
With the ‘financials’ and ‘materials/energy’ sectors accounting for 65% of the index, the other sectors almost pale into insignificance. But the materials sector has been hostage in the quarter to the events in Europe. While base metal and iron ore prices have fallen, oil prices have been firming, and this divergence is inconsistent with the pessimistic view that the world economy is going into a deep recession – I think it’s too early to call the commodity boom over.
As such, we remain overweight in resources and energy.
I’m a little more certain about the outlook for the financials sector. Longer term, regulatory pressure for increased capital and lower return-on-equities (ROEs) will make returns from this sector less attractive. This sector will lag in a sustained market rally. However, it’s very hard to go past the high fully franked dividends some of these stocks offer and hence our view to remain at indexweight. Stick to the major banks – avoid the insurance companies and second-tier banks.
Of the other sectors, we remain underweight in ‘industrials’ and ‘consumer discretionary’. Continuing European crises will see the Australian dollar weaken and the Reserve Bank of Australia (RBA) acting to cut interest rates more aggressively, which will support both sectors. If this scenario plays out, I would be more inclined to look at some of the industrial companies, as the structural change in how consumers shop is not going away.
Our views on the major industry sectors that comprise the ASX 200 are as follows:
[1]
Finally, is there anything to learn from how the market has been trading over the last few months? Well, it is a fairly messy picture that really depends on the time frame, as the table below shows:
[2]Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: The reasons for and against a stock market rally [3]
- Tony Negline: Get real about retirement [4]
- Rudi Filapek-Vandyck: The broker wrap: improved performance [5]