Australian Market Performance By Market Cap
Markets have been challenging over the past quarter, particularly given the roller coaster ride of the past couple of months, with the worst August performance for decades followed by the best September performance in 70 years. In Part 1 of our Quarterly Review we examined the market on a sector-by-sector basis and discussed some themes for the investment landscape for the rest of the year.
Now we review the ASX market’s quarterly performance, drilling down into the market on a market capitalisation basis. This performance is illustrated in the chart below:
Chart: ASX Market Performance by Market Cap for the Quarter Ending 30 September, 2010.
Why Consider Market Capitalisation?
There are a number of reasons why investors and traders will look at market capitilisation when evaluating stocks. Liquidity may be an issue, depending on the size of the investment portfolio. Options traders will likely only consider the ASX20 for liquidity reasons. Large Cap, Mid Cap and Small Cap stocks will perform differently at various times in the market investment cycle.
Large Caps tend to outperform when investors are more bearish or cautious, while Small Caps are more likely outperform when the bulls are in control because they are more likely to accept the inherent risk.
For the purpose of this analysis we have defined Large Caps as: ASX20 (.AXTL), ASX50 (.AXFL), ASX100 (.AXTO), ASX200 (.AXJO), ASX300 (.AXKO), then Mid Caps as: MidCap50 (.AXMD), MidCap_Industrials (.AXMD), MidCap_Resourcs (.AXMR), and Small Caps as: SmallCap_Industrials (.AXSI), SmallCap_ORDS (.AXSO), SmallCaps_Resourcs (.AXSR).
Note: codes in brackets are for use in the Market Analyser software. Use these codes to review indices, and drill down to examine the stocks within. If you are not a Market Analyser user, sign up now for a free software trial.
Year-to-Date Performance
The year-to-date (YTD) performance (as shown by the black bars in the above chart), illustrates just how difficult this market has been for long term investors, who tend to concentrate on Large and Mid Cap stocks. Year-to-date performance has been generally negative, with the exception of resource stocks in the Small Caps (up 9 percent year-to-date), which outperformed the Mid Caps and Large Caps for the year-to-date. So investors and traders who ignored the Small Cap resource segment of the market will likely underperform for the year.
Monthly Performance
The month of September (as shown by the green bars in the chart) has been positive across the board, generally up around 4 percent. However the resources segment of the Small Cap and Mid Caps outperformed, growing 13 percent and 7 percent respectively. Small Caps as a whole also outperformed up 8.1 percent for the month.
Quarterly Performance
The quarterly performance (as shown by the blue bars in the chart) has been strong for all indices, particularly when you consider the dismal performance in the month of August. Large Caps rose around 6 percent for the quarter and Mid Caps rose over 8 percent. Both were outperformed by the Small Caps, rising over 10.5 percent. Resource stocks again outperformed the lot, with Mid Cap resources up 16 percent and Small Cap resources up over 20 percent for the quarter. So investors and traders who ignored the Small or Mid Cap resource segment of the market will likely have underperformed for the quarter.
Conclusions
Investors who concentrated on larger cap stocks could have concentrated on the ASX20 and still have generated a similar performance to those who used the ASX300 as their stock investing universe. This is something that longer term investors should note because it is much easier to keep track of 20 stocks versus 300 stocks.
Small Cap stocks have outperformed over the past month and quarter. Within the Mid Cap and Small Cap criteria, resource stocks have spectacularly outperformed in the past month and quarter. Investors need to decide whether this outperformance will continue.
The Trade
Given the market’s performances over the past quarter and year-to-date, there are a number of strategies traders and investors can use including relative strength comparisons or mean reversion. Investors who use relative strength comparisons and look to trade strong stocks in strong segments of the market should concentrate on the resource stocks within the Mid Caps and more particularly within the Small Caps. Small Caps in general are outperforming but they do present high risk too.
Investors who use a mean reversion strategy may want to concentrate on the
ASX20 or ASX50 which have been underperforming the Mid and Small Cap segments of the market.
In the coming weeks we’ll be examining market segment performance further, so stay tuned.
By Michael Hevern
Head of Research
Tags: ASX, ASX News, ASX20, ASX50, market capitilisation, quaterly review, sector analysis, Stock Market Analysis, Trader Dealer
[...] market is being driven by the performance of our resource stocks which we highlighted in our recent Quarterly Market Performance Review. The other market sectors (with the exception of the Consumer Staples sector) are all [...]