The theme for my next series of reports is an overview of each of the major sectors of the ASX 200. In this first of these contributions, the background is set by reporting at a high level on all of the sectors. In each of the future contributions, one sector will be analysed in detail.

The 11 sectors

The 11 major sectors of the ASX 200 are listed in column one of the table. Using broker forecasts of dividends and earnings, Woodhall produces 12-month forecasts of total returns (including dividends but not franking credits), capital gains and the yield for each sector and the aggregate.

Exuberance is our measure of mispricing and it can change markedly from day to day. All data in the table were current at the close on 22nd October 2012. Updates are published on the Woodhall website each Saturday.

The Consenus recommendations are the averages of the broker buy/hold/sell calls from brokers weighted by market capitalisation for the companies within each sector. Market share is the relative size of the market capitalisations of each sector.

Table: Forecasts and measurements for the ASX 200 and its major sectors

Note: the estimates in the Table are current to the close of business 22nd October 2012. They are based on Thomson Reuters Datastream. Please go to www.woodhall.com.au for more information on the assumptions behind the estimates.

At this point in time, the outlook for the ASX 200 is bright with a capital gain forecast of 11.5% but, as the sector is slightly overpriced (+2.2%) care should be taken with buying the index. However, not all sectors are overpriced and their 12-month ahead expectations show a broad divergence.

Woodhall uses an exuberance level of +6% as a ‘danger sign’ that the sector or index might correct or move sideways for a prolonged period. Clearly Health is above that range but it has retreated slightly from recent highs of +8%. Consumer Staples, Financials, Property, IT, and Telcos are all too close to that 6% level for comfort. These estimates suggest that future growth of these sectors might be muted or may contract sharply before growth to trend level is re-established. Possibly, there will be some rotation from these sectors to the cheaper ones.

Energy, Materials and Consumer Discretionary are only mildly overpriced. Industrials and Utilities are slightly cheap. While there are other important statistics to be considered when building or maintaining an equity portfolio, Materials, Industrials and Utilities are currently strong sectors being not significantly overpriced and with good growth prospects.

The Consensus recommendations are all in a narrow range because of the averaging across companies in these sectors. Note that:

• 1 is a buy,
• 2 an outperform,
• 3 a hold,
• 4 an underperform, and
• 5 a sell.

Only Telcos – dominated by Telstra – do not exceed the hold recommendation. Materials – including BHP and RIO – again looks good using this statistic. It is rare that a sector has an average recommendation above ‘2’.

While the current equity market seems reasonably stable, that has not been the case in recent times. Most resource-related stocks were hit badly in September as iron ore prices plummeted before rebounding. It is not wise to place too much reliance on statistics for a given day such as in the Table. In the individual sector reviews, a recent history will be included to better judge how much equity to hold in each sector, if any.

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.