Hibernation is over, but it’s the sectors that count

Co-founder of the Switzer Report
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It’s starting to look like a bull market – at least if you go by the official figures rather than the doom and gloom in the mainstream media. The year-to-date figures are actually quite impressive.

A couple of caveats, however. The last week of December 2011 was pretty dreadful – the market fell by over 3% on almost no volume. On the flipside, the accumulation index (which includes dividends) doesn’t take into account the benefits of any imputation credits to a super fund – so on paper, the after-tax performance of some funds this year could be looking quite healthy.

As has been the case for a while, this doesn’t tell the whole story – the variances in sector performance have been quite marked.

Winners and Losers

On price returns only, Health Care stars with a 27% gain, while Materials on -5.0% is at the bottom, as the following table shows:

Where to from here

We have been wrong about calling an overweight position in materials. There is so much confusing data over China at the moment, with the bears noting the slowing economy and current over-supply in the production of raw steel. The bulls cite further government stimulus attempts, and long-term per capita steel consumption data suggesting that China is tracking along a similar trajectory to Japan and Korea in earlier decades – and has some way yet to go. With stock prices in prime resource stocks such as BHP Billiton (BHP) and Rio Tinto (RIO) off by 30% from their 36-month highs, we are going to stick with our overweight view (for growth investors).

Of the other sectors, we continue to like health care. We aren’t too excited about consumer discretionary or industrials, and largely pass on real estate. The latter sector has enjoyed a really good run, however its lack of tax effectiveness for a self-managed super fund (SMSF) counts against it.

Our sector views in terms of relative weightings for both ‘income’ biased funds and ‘growth’ biased funds, together with the current S&P/ASX 200 sector weights, are as follows:

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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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