Week In Review

Economy and Indices

So far this week the Australian and European markets have risen while the US and Chinese markets are down.

Australian Market Correlations over the last month:

– US = Insignificant
– UK = Insignificant
– German = Insignificant
– Chinese = Insignificant
– Japan= Insignificant
– India= Significant

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. 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. In the context of the last year, oil prices performed reasonably well this week, however that performance was also the ‘least best’ on the ASX this week.

WPL, CTX and OSH are the largest companies in this sector. After significant falls in the their respective share prices any rebound in prices is a notable higher percentage that the other sectors. Erect rallies from continuously falling shares are called ‘Bear Rallies’, or ‘Sucker Rallies’ which this sector is current prone to.

2. Consumer Discretionary (retail)

This sector is more evenly spread than most sectors on the ASX and provides a balanced view of the sector.

Some of the large Consumer Discretionary shares performed well this week. Larger shares of note are ALL, CWN, TTS and DMP making new highs.

3. Consumer Staples

Woolworths (WOW) and Wesfarmers (WES, ‘Coles’) dominate this sector.

Similar to the energy sector, WOW is coming off a low base from last week and their bounce back has taken this sector to the top groups

The Weakest sectors were:

1. InfoTech

The IT sectors on the ASX is 44% Computershare (CPU). CPU did not perform well this week, which has driven IT to the wooden spoon this week. The movement of CPU and the Info Tech sector is not indicative of the whole sector.

There are dozens of much smaller IT companies that have performed exceptionally well this year, however most are not even in the ASX Top 300, let alone the ASX 200 which means they have no impact on this index.

See Market Darlings below for some of these leading IT companies.

2. Telecommunications

Telstra (TLS) dominates this sector with a staggering 78% weighting. It is fair to say that where TLS goes, the Telcos go. Telcos have been the second strongest sector over the last 5 years.

What is worth noting is that Vocus (VOC) and TPG (TPM) are up 500% and 675%, respectively, over the last 5 years, This compares to TLS up 200% over the same period. Despite the strong rallies from VOC, MTU and TPM this week, these companies still have low weighting, and therefore low impact, to the sector as a whole.

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, month, or last year.

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 and Mid-Cap index are continuing to out-perform the larger segments (Blue Chips). The pattern emerged as the market started falling in April 2015 and has continued for the most part.

This week the stronger performances of the smaller cap segments has shown up again with the Top Twenty (blue chips) getting the wooden spoon.

This pattern is a simplification of the rotation from the previous market leaders (Banks and Telstra, or ‘Yield Compression’) to the smaller growth companies which started in early 2015. These smaller growth companies are mentioned in the Market Darlings and Themes below.

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

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).

‘Inverse Oil Exposure’ has continued to perform well. These are companies whose bottom line is positively impacted by lower oil prices. Examples are SYD, QAN and other transport related companies. One small-cap to note is ZNZ who import, distribute and sell transport fuel.

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.

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

Food related producers/distributors are also performing well although are only represented by small market capitalised companies.