Over the year ending 30 June the ASX 200 Accumulation index fell
It was another disappointing year for sharemarket investors as
global growth concerns dominated investor sentiment.
Unsurprisingly, those sectors with more defensive earnings
outperformed the broader market. These included Telecommunications
+27%, Utilities +10% and Health +8%. In contrast, sectors with
cyclical earnings, especially those most exposed to global growth,
underperformed. These include metals & mining -32%, materials
-30%, and energy -21%. Gold also was a key underperformer on
volatile trading. In recent years, gold had become the preferred
safe haven but prices reversed as investors chose alternative
havens (Swiss franc, US dollar, Australian dollar) on valuation
Our outlook on some of the main sectors follows:
Recommendation: Modest Underweight
Despite subdued housing credit growth and business credit growth,
the major banks have continued to generate strong profits from loan
margins and fees and charges. We expect this trend to continue over
FY13. With gross dividend yields of around 10%, prices are likely
to remain well supported. Nevertheless we recommend a modest
underweight exposure to this sector as the potential contagion
effect from a Eurozone banking crisis remains a risk.
Recommendation: Moderate Underweight
Over-investment in housing and infrastructure in China is likely
to lead to a slowdown in demand for Australia's key resources
(particularly coal and iron ore) over the next 12 months. With
global growth slowing and supply increasing, it is unlikely that
the slack will be taken up by other countries. In the short term,
recent efforts by Chinese authorities to stimulate growth (reduced
interest rates and announced some new infrastructure projects) may
provide some relief but this is likely to be short-lived.
Recommendation: Market weight.
Slowing global growth coupled with plentiful oil inventories,
should theoretically put downward pressure on oil prices. However,
ongoing tensions in the Middle East (in particular, the United
States aggressive stance against Iran) have the potential to send
Recommendation: Moderate underweight.
Recent interest rate cuts coupled with relatively low levels of
unemployment should provide some support to the beleaguered retail
sector. That said, the structural shift to on-line shopping
continues unabated and that, together with ongoing global
uncertainty, may well counteract the positives.
In the short term, deteriorating global economic fundamentals
coupled with domestic challenges may limit near term sharemarket
gains. For this reason, we continue to favour high quality
defensive stocks over those exposed to cyclical growth.
Nevertheless, the Australian sharemarket continues to trade on
depressed multiples that represent compelling value for investors
prepared to adopt a long term view. Further, the gross dividend
yield of over 6% compares favourably to alternate income options
(albeit less risky) such as cash and bonds. On balance, we
recommend trimming exposure from moderate overweight to mild
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