Week In Review

Economy and Indices

The Australian market was down each day this week. The ASX top 200 (XJO) bounced off 5000 points on Thursday which is around the lows since mid-August.

Australia’s November unemployment rate was below expectations

So far this week all the share markets of the developed economies are also down

Sectors

Sectors on the ASX are a classification which is given to each listed company to describe the industry group they operate within.

The top three sectors this week were:

1. Gold

Newcrest (NCM) dominates this sector with about 50% weighting, however there is a reasonable spread for the remainder. For the context of Gold’s normal volatility, this was a mild up-week in contrast to the rest of the ASX.

The leading, mid-sized, Gold shares this year have been NST, SBM and RRL.

2. Property

Also known as ‘AREITs’ (XPJ) and is fairly well spread across the sector. This sector is rather defensive with consistent yields and rather steady asset/company values. With the low interest rate environment in AU and the ‘Yield Compression’ of 2015, this sector has performed reasonably well. However, since the Big 4 Banks dropped out of favor in April 2015 this sector has stopped rising and churned sideways, somewhat better than the overall ASX.

3. Industrials

This sector has been re-shaped since the mining and mining services industry fell out of favour after 2008. Industrials are now led by transport companies, representing seven of the 10 largest in this sector. This means the Industrials sector often represents and ‘inverse-oil’ trade and its performance can be dictated by the price of oil. Other large Industrial shares have a positive exposure to the USD. Together these two biases make this sector less of a representation of the Industrials’ performance in AU, but a function of the USD and oil prices.

The largest names and best performers in the sector are MQA, SYD, QAN, TCL and AIO.

The Weakest sectors were:

1. Energy (oil and gas)

Energy is a cyclical sector and its performance is often a function of the world prices for oil and gas commodities. Oil performed poorly this week and so too did the three largest in this sector were strong -Woodside (WPL), Oil Search (OSH) and Origin Energy (ORG). OSH is also no longer under a takeover offer.

2. Financials (Excluding Property)

Financials (ex. Property (XXJ)) is dominated by the Big 4 Banks. Because of the Big 4 Banks’ dominance on the XJO this reinforces the ‘Beta’ driven market moves of this sector, which means because of XXJ’s sheer size on the XJO, it’s difficult for either index to move in the opposite directions.

Recently there has been a de-coupling of the large banks in Australia; CBA and WBC have recovered more than ANZ and NAB. This shows a higher risk has been attached the latter two, which appears to be attributed to a risk of raising more capital. This year Bank of Queensland (BOQ) is the leader is the banking group by a long margin.

3. Materials (mining)

Materials are dominated by BHP and RIO, together making up 44% of the Materials index (XMJ).

The strongest contributing factor to Materials being down is BHP returning to 2008 lows. This fall is a combination of both company-specific news and world commodity prices that have not been helpful to this sector this week.

Segments

Segments are the classifications given to companies of similar sizes for their market capitalisation (total company value by share price).

Within the ASX Top 200, the segments are:

– The 50 largest (‘Fifty Leaders’) and generally called the ‘blue-chip’;
– The next 50 companies (from 51 to 100th largest) are the ‘Mid-cap’ shares; and
– The last 100 of the Top 200 (from 101 to 200th) are the Small-caps’.

The Small Cap shares (XSO) was the best performing segment this week. This often coincides when Industrials and Consumer Discretionary shares perform well for the week.

The Mid-cap (XMD) shares have led the ASX for a few months and were the second strongest this week. The Emerging companies (XEC) provided a similar performance to the Mid-Caps this week.

The Twenty Leader (XTL) were the weakest, which often coincides with Financials (XXJ) performing poorly.

Market Darlings:

These are the shares we all wish our portfolios were filled with – the leading shares of the leading groups on the ASX.

Leading Market Themes

Consumer Discretionary shares have continued to perform well, notably: professional services, auto companies, food, media and entertainment companies. There are significantly more Consumer Discretionary shares in the Mid-Cap index (XMD) than the Top 50 (XFL) which has helped the Mid-Caps to continue to provide strong returns over the last six months. Given the small weighting the Mid-caps have on the XJO, the positive movements over the last few months have been negated by the largest companies in the XJO.

Technology companies, mostly software/‘cloud’ related and non-physical solutions, are providing the strongest returns on the ASX. A lot of these companies are small and mirco-caps and some are not even in the All Ords index (XAO).

Retirement related services also continue on a steady rise. These shares range from retirement homes, healthcare facilities and ageing services and technologies.