Australian Market Sector Performance
The first quarter of 2011 has thrown up some major challenges for investors and the market.
The year began with major floods and cyclones across the eastern seaboard of Australia, geopolitical unrest in the Middle East and North Africa, the simmering European sovereign debt concerns, and most recently the Japanese earthquake and tsunami and the subsequent nuclear crisis. All these factors have combined to cause some major volatility throughout the quarter.
The major driver of market volatility has been the devastating Japanese earthquake and tsunami, and the nuclear crisis which followed sending markets plummeting. Most markets have since rebounded sharply as investors look to the post-disaster rebuild as another catalyst for demand on commodities and construction.
Investors have generally been able to focus on global growth, putting the chaos to the side. The Aussie market has underperformed China, which is up 4%, and the US markets are over 5% for the quarter, while the S&P ASX 200 has risen 1.8%.
Another key issue for investors will be the need to monitor the Aussie dollar which has again reached post-float highs of $US1.0372, the highest level for 29 years.
Inflation remains a concern near-term, with interest rates expected to rise in China and Europe, and even the US is talking about rises in the future. The key driver for the US markets next quarter will be the reaction of investors when the accommodating quantitative easing is withdrawn (planned for June), and the jobs data. In Australia the RBA is expected to leave rates on hold for the near-term.
In the commodities space crude oil has outperformed for the quarter due to the geopolitical unrest, up 16.8%, while gold ended up 0.6% and copper fell -3.8% over the same period.
Global economic news has remained supportive of the view that the economic recovery is still intact. Nevertheless investors will need to continue monitoring interest rates, the geopolitical unrest in the Middle East and North Africa, the Japanese nuclear crisis and the European sovereign debt issues in the near-term.
The Aussie market has underperformed the US and has been very much a stock picker’s market. The energy sector remains the key driver for the ASX. There is an old adage “sell in May and go away” which should serve as a warning for investors this quarter.
We have taken this opportunity to review the Australian market’s quarterly performance to date by analysing the performance on a sector-by-sector basis. This performance is illustrated in the chart below.
Chart: ASX market performance to date by sector for the quarter starting 1 January 2011.
The year-to-year rolling (YoY) performance has been negative for all sectors except Energy and Materials (as shown by the black bars). The chart illustrates that it has been a tough 12 months for all other sectors. Now we see that for the rolling-year (YoY), Energy (up 6.7%) and Materials (up 11%) have shown strength for the year, with all other sectors under-performing.
The serial under-performers continue to struggle, including Consumer Discretionary (down -9.2%) and Telecoms (down -6%), though through Telstra the telcos are making a comeback. The tech sector on a YoY basis is the biggest under-performer, down 18.4%, while Industrials and Financials have also been under-performing on YoY basis.
We have seen the market volatility spike this month due to the Japanese disaster, but there are a number of sectors that have recovered into the positive. The performance for the month of March (as shown by the green bars) has been subdued, with the exception of the Energy sector which has managed gains of over 3.3%, while the Materials, Healthcare, Telecoms, Utilities and Healthcare sectors have managed to eke out gains for the month. The key turnarounds have been the Financials and the Telecommunications sectors which were helped by the progress on the NBN. Poor retail sales figures and consumer sentiment have impacted the under-performing sectors for this month, which have included Consumer Discretionary, Consumer Staples and the Info-Techs, which are all down for the month.
Quarterly Performance for 2011 – Q1
The quarterly performance (as shown by the blue bars), has been subdued with the exception of a number of key sectors. Growth sectors have remained in the positive, with Energy (up 5.3%) and Materials (up 0.9%), while Financials staged a turn around (up 3.5%) from last quarter’s under-performance as they run up to their dividend payment period. Meanwhile other defensive sectors have plunged for the quarter, including Info Tech (down -8.8%), Utilities (down -3.7%) and Healthcare (down -0.5%). Consumer-related sectors actually recovered, with the Consumer Discretionary and Consumer Staples sectors flat the quarter.
The market remains a stock picker’s market, as shown in the sector performances over the past quarter. Those who subscribe to MDS Financial Research get timely recommendations as individual stocks start to move – sign-up for a trial to see try it for yourself.
In summary, the Energy sector continues to outperform and there has been a clear improvement in the performance of the Financial sector. On the other hand there’s been significant under-performance in the Info-Tech sector, and the shine has been lost from Materials.
Consumer-related stocks have been suffering but did manage to recover in the last quarter. Aussie interest rates are likely to remain on hold for the near-term and the Aussie dollar being at record levels will impact corporate earnings.
Given the sector performances over the past quarter and year-on-year, there are a number of strategies that traders and investors can use, including relative strength comparisons and mean reversion.
1) Investors who use relative strength comparisons and are looking to trade strong stocks in strong sectors should concentrate on the Energy, Materials, Financials and Telco sectors for trading into the second quarter of 2011. Using relative strength we would expect the Info-Tech and Utilities sectors to continue to under-perform.
2) Investors who use a mean reversion strategy may want to concentrate on Info-Tech and Utilities, which have been under-performing the broader market. If looking for the market to pull back, then look to the outperforming sectors, Energy and Financials to retrace.
Investors should gain confidence from the Financials sector which is starting to participate in the ASX performance as it pushes towards new yearly highs, beyond the 5000 level in 2011.
The investment themes for the next quarter will be:
* the economic recovery from the domestic floods and droughts, and the Japanese disaster
* geopolitical unrest in the Middle East and North Africa
* commodity supply constraints and pricing
* a strong Aussie dollar
* corporate earnings
* interest rates and inflation
* continuing M&A activity
Note: ASX_200 [.AXJO] Energy [.AXEJ], Materials [.AXMJ], Financials [.AXFJ], Utilities [.AXUJ], Discretionary [.AXDJ], Staples [.AXSJ] and Healthcare [.AXHJ]
Codes in brackets above 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.
Stay tuned for further analysis of the quarterly performance, as next time we will examine the Australian market’s performance with stocks broken down by market capitalisation.
Bu Michael Hevern
Head of Research