Part 2 – ASX Performance by Market Capitalisation
Markets had a great run in the last quarter of 2010 (Q4), particularly in the final month of the year. This was despite the big sell-off in August 2010, which was the worst August performance seen for decades, but it was followed by the best September performance in 70 years.
In Part One of our Q4 Quarterly Review we began our look at the investment landscape for 2011 by examining the market on a sector-by-sector basis. Today we’ll continue by looking at 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 31 December 2010
Why Consider Market Capitilisation?
There are a number of reasons why investors and traders will look at market cap as a criterion for selecting stocks. Liquidity may be an issue, depending on the size of the investment portfolio. Options traders are likely to only consider the ASX20 for liquidity reasons. Large-cap, mid-cap and small-cap market segments 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 and mid-caps are more likely to outperform when the bulls are in control because this is when traders are more likely to accept the inherent risk.
For analysis purposes, we have defined large-caps as ASX20 (.AXTL), ASX50 (.AXFL), ASX100 (.AXTO), ASX200 (.AXJO), and ASX300 (.AXKO). Mid-caps are defined as MidCap50 (.AXMD), MidCap_Industrials (.AXMD), and MidCap_Resources (.AXMR), and finally in small-caps we have SmallCap_Industrials (.AXSI), SmallCap_ORDS (.AXSO), and SmallCaps_Resources (.AXSR).
Please note that 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 you can sign up now for a free software trial.
2010 Annual Performance
The 2010 annual performance (YR_2010, 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. Annual performance has been generally negative with the exception of mid- and small-cap resource stocks – both segments rose over 30 percent in 2010. The stocks making up the Small Ordinaries index also outperformed, increasing by 10 percent for 2010. The other indices examined had a negative performance of around 5 percent, with mid-cap industrials being the worst performers, down over 8 percent.
Investors and traders who ignored the mid- and small-cap resources (and the small ords) segment of the market, would have underperformed for the year.
Monthly Performance
Santa Claus delivered again in 2010 with the bulk of the quarterly performance being delivered in the month of December. December performance (Mth (DEC), as shown by the green bars in the chart) was positive across the board, generally up over 3 percent. This being said, the resources segments of the small-cap and mid-caps outperformed again, growing 10 percent and 15 percent respectively. Small caps as a whole also outperformed up 7 percent for the month.
Quarterly Performance
The quarterly performance (QTR_10Q4, as shown by the blue bars in the chart above) has been strong for all indices, but it is clear that the bulk of the gains came in December. The top ASX 300 stocks rose around 3 percent for the quarter. The mid-cap top 50 doubled its performance, up 7 percent, but mid-cap industrials were flat.
A highlight has been that of the market segments which outperformed for 2010, the quarterly performance for Q4 delivered the bulk of the annual gains. The small-caps also outperformed with the small-ords up 11 percent and the small resources up 19 percent. The mid-cap resources outperformed everything, up a staggering 28 percent.
Investors or traders who ignored the small or mid-cap resource segments of the market would have underperformed for the quarter.
Year-to-Date Performance for 2011
The annual performance (YTD_2011, as shown by the red bars in the chart above), illustrates that the year is off to a steady start, up around 1 percent since the start of 2011, but the bulk of the performance has been delivered in the past couple of days. At this stage it is unclear as to which sectors are set to outperform.
Conclusions
Investors who concentrated on larger-cap stocks for 2010 could have simply concentrated on the S&P 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, as it is much easier to keep track of 20 stocks rather than 300 stocks.
Small-cap stocks have again outperformed over the past month and quarter. Within the mid-cap and small-cap criteria, resource stocks have again spectacularly outperformed in the past month and quarter. Investors need to decide whether this outperformance will continue.
The Trade
Given the market’s performance over the past quarter and year, there are a number of strategies that 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 continue to concentrate on the resource stocks within the mid-caps and more particularly within the small-caps. Small-caps in general are again 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 for more than a year.
The investment themes for this year will be:
* the economic recovery from floods and droughts;
* commodities supply constraints and pricing;
* improving corporate dividends;
* interest rates;
* and continuing M&A activity.
In the coming weeks we will be analysing the market segment performances in more detail, so stay tuned.
By Michael Hevern
Head of Research
