ASX investors: Don't pop the champagne just yet

The local market is making hard work of getting back to where it started.

Ring the bells if you must, but the message from the almost there rally on the ASX is not entirely convincing.

In the overall scheme of things, it is a late attempt to get back to where we left off at the start of the year.

No doubt the prospect of having lost nothing over the year is a great relief to many sharemarket investors.

But let’s get serious, despite powerful tailwinds from Wall Street and an enormous government stimulus, our market has yet to start making money on a net basis for most investors.

Pretty soon, we’ll get to celebrate crossing the point we had reached at the start of the year - 6684 - before Covid-19 struck. Only then will we get to see the true colours of this recovery rally.

Unless investors have stuck bravely with a smart stock selection all year - this has been a tough ride.

What’s more, for a new generation of investors in Exchange Traded Funds that simply mirror the indices, the sense of treading water must be acute.

If we ignore dividends, then ETFs based on the wider market are roughly back to where they were in January and only a sliver higher than where they were in November 2007 - 13 years ago when the ASX struck 6873.

Nonetheless, Mr Market’s mood as we close out the year has certainly improved, as it should off the back of increasing good news on Covid vaccines and a better-late-than-never resolution of the US election.

This week’s sharemarket rally reflects a thematic change also occurring on US markets - a rotation from growth to value stocks - or you might say a change in emphasis from crazy prices for tech stocks and a new focus on battered blue chips.

The longer an unquestioning rotation into beaten up market leaders goes on the better for the majority of Australian investors who remain dependent on big cap market leaders, particularly banks.

Xero, Afterpay, NextDC get a lot of the spotlight but they are minnows against bank stocks.

Taking NAB as a sterling example of our beaten up blue chips, the stock gained another 3 per cent on Wednesday and is now back to where it was about a year ago or eight years ago, or indeed 21 years ago in 1999, when it was worth more than it is now.

The bias towards growth stocks is why the Dow Jones Industrial Average hit 30,000 this week and why the US is up 62 per cent since the crash.

The S&P/ASX 200 is up 52 per cent.

It is also why ASX investors might need to hold the champagne ... for quite a while.

Remember growth focused tech stocks make up 40 per cent of the US market now, and to contrast, they make up about 8 per cent of our market.

The tech sector simply cannot carry the ASX. Once this post lockdown spike in sales and sharemarket prices ends, the bulk of the ASX has to come through with the profit growth that ultimately underpins prices.

As Bruce Apted, Head of Portfolio Management – Australia, Active Quantitative Equities at State Street puts it: “Energy, REITS and Transport have outperformed the most on the vaccine news while some of the best performing sectors like Information Technology, Healthcare, Gold and Consumer Discretionary underperformed the most ... The recent outperformance of the lower quality, more distressed securities with higher volatility is atypical. Historically we find these bouts of outperformance are often short-lived and we caution against over-extrapolating this recent development.”