With so many exciting things going on in the market, I have decided to wrap up this third round of my sectoral review today and then move on to some more topical and fascinating subjects likely to evolve in future weeks and months. Reporting season is underway and world growth seems to be building!
There are eight sectors left to review: four are the so-called high-yield sectors (financials, property, telcos and utilities) and four are ‘the others’ (consumer discretionary, consumer staples, health and IT). I had the high-yield sectors largely ‘on hold’ in my super fund – but ‘on a sell watch’ in my margin loan account outside super – since about April 2013 because of dividend compression. I actually executed my sells of all of my banks in my margin loan account near the end of October 2013.
The yield chase
What I had noted from earlier versions of Chart 1 is that widely disparate expected yields came together at between 5% and 6% from April 2013. I surmised that there was a floor for yields of about 5% to reward investors for equity risk over holding cash. So a potential floor for yield meant no capital gains were likely to be forthcoming – and my exuberance measure was above the ‘magic 6%’ threshold that I use to pick such moments – a clean out of those sectors became appropriate.
These yields have largely kept closer together than they historically have for nearly a year. As the Fed’s tapering of the US stimulus program took hold over the last few months, yields in these sectors rose to nearly 6% and the capital gains forecasts in Graph 1 are starting to make these sectors attractive again.
Graph 1: Expected dividends for the ASX 200
Source: Woodhall Investment Research & Thomson Reuters Datastream.
The poor jobs data in the US on 7 February 2014 seems to have had an impact on investors’ demand for yield. More recent sharp price rises in the banks and others are rapidly eroding expected yields in these sectors. It is not too late to buy in for a super fund but not, in my opinion, for a margin loan portfolio.
Some healthy signs
Turning to the ‘other’ sectors in Table 1, their expected gains are starting to look healthy using my exuberance measure, but largely because they had been oversold. Recent data on consumers borrowing behaviour and confidence levels are seemingly guiding investors into the discretionary and staples spaces.
Although broker forecasts for the health sector are still very strong, many stocks – include CSL and Ramsey – have run so hard over the last year or so, I find it hard to be too positive about most stocks in this sector, especially as the expected yield is typically so low.
Table 1: ASX 200 sector statistics
Source: Woodhall Investment Research & Thomson Reuters Datastream.
So, with reporting season starting in earnest this week, sharp investors will be looking for signs in outlook statements of more promising futures. At this point in time, energy and industrials stocks look the best for capital gains, while the high-yield four can produce steady incomes for those who need or want it.
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.
Also in the Switzer Super Report:
- Peter Switzer: Charlie Aitken on earnings season and the right kind of surprises [1]
- Geoff Wilson: Warren Buffett’s favourite book [2]
- Louise Biti: My SMSF – hard work pays off [3]
- Staff Reporter: Buy, Sell, Hold – what the brokers say [4]
- Tony Negline: Is asset segregation in your SMSF right for you? [5]
- Questions of the Week: ETFs and listed bonds, floating-rate notes and hybrids [6]
- Brittany Ruppert: Do you know what a bitcoin is? [7]