The Australian stock market is up by 7.6% in price terms this calendar year; on an annualised basis, that’s almost 25%! Who said we are not in a bull market?
Having said that, there is a little bit of ‘lies, dammed lies and statistics’ in these numbers, as the last couple of weeks in December 2011 were a shocker, meaning the rise is coming off a very low base. However, the inescapable conclusion is that the market seems to be slowly ticking higher.
If this trend continues, how should we approach our sector allocation? Is it time to reweight, potentially, to some of the resource stocks?
On the macro side, little seems to have changed since we last reviewed our weighting: there is a little more calm in Europe, intermixed with regular panics over bond auctions; the US is slowly recovering; Australia is moribund (apart from the mining services sector); metal prices have fallen (though not collapsed); and China continues to grow at a healthy rate of around 8.2% per annum. The doomsayers continue to preach about the imminent collapse of the Chinese property market, but the glass half-full cadres say the moderate slowdown in Chinese growth is being carefully orchestrated by the government.
Commodities
We remain a believer that the industrialisation and urbanisation of Asia will drive demand for Australia’s commodities (iron ore, copper, gas and coal) and that an overweight position in the ‘materials’ and ‘energy’ sectors is the way to go. Surprisingly, the Materials sector is now priced on a price-to-earnings (PE) basis that is below the market average – not what you would expect for a so-called growth sector. Charlie Aitken’s strong endorsement last Thursday in the Switzer Super Report to buy BHP at these levels was particularly interesting.
Financials
In the Financials, negligible revenue growth and the regulatory pressure coming through Basel III for increased capital will cloud the growth prospects of this sector. In a sustained market rally, this sector will lag. However, it is very hard to go past the high fully franked dividends and hence our view is to remain at index weight. Stick to the major banks.
Others
Of the other sectors, we continue to stay underweight in consumer discretionary, although it appears to have bounced off the lows in February and some of the second-tier stocks have done well. Healthcare is the interesting one; CSL is on a roll and Ramsay just goes from strength to strength. We remain moderately overweight ‘healthcare’.
Our views on the major industry sectors that comprise the ASX200, and their sector weights, are as follows:
*Weightings are as at 19 April 2012.
Finally, can we learn anything from how the market has been trading since the start of the year? All sectors are up and interestingly, with not that much variation between the best and the worst (see below). It is not that surprising that in a rising market, Telecommunications (which is largely Telstra) and Consumer Staples bring up the rear. The interesting point is that it is the Industrials, particularly those servicing the mining and resource industries, and the Consumer Discretionary sector that are leading on price returns. In the latter, it is those companies in the Consumer Services subsector such as Crown, Tatts Group and Flight Centre that are driving this sector rather than Harvey Norman, DJs, JB Hi-Fi or Myer.
Price Returns by Sector
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