Why this year’s ASX bounce is more convincing than Wall St
Wall Street stocks are having a better year so far, but Australia’s sharemarket is more broadly based – and that’s better for investors.
Investors are being reminded that a healthy bull market is broadbased, with most segments of the sharemarket participating.
The message that is currently doing the rounds on US shares is the exact opposite, with plenty of research highlighting this year’s gains for major US indices can be traced back to only 10 companies.
Over the year to date the ASX is up by about 6 per cent, the S&P 500 is up by nearly 8 per cent and Nasdaq is up more than 15 per cent.
It’s one of the quirks of indices. In the US, four large index constituents make up more than one fifth (20 per cent-plus) of the S&P 500. The three largest constituents of the Nasdaq make up 30 per cent of that index. In Australia, BHP alone makes up 11 per cent of the ASX 200. Add Comm Bank and CSL and we have a similar outcome.
But in Australia this year’s gains cannot be ascribed to the top 20 per cent as only shares in CSL posted gains up until the Easter long weekend. BHP is slightly in the minus (if we exclude the dividend paid) while CBA shares are down by 3.5 per cent, which is not fully offset by its half-yearly dividend.
While the implications are that most US investors are still finding the sharemarket a rather tough experience in 2023, in Australia the situation looks a lot more comforting. Some 60 per cent of the local top 20 is sitting on capital gains, which suggests a different underlying dynamic Down Under.
Scrolling through the ASX 200 for the year to date, market gains have been carried by gold miners and an elite collection of commodity exposures (selected lithium, BlueScope and some iron ore) while the insurance sector, including brokers, features as a standout performer, as does the automotive sector through the likes of ARB Corp, Eagers Automotive and GUD Holdings.
Two other easily identifiable groups are some of last year’s laggards bouncing back hard and your typical defensives in Coles, Telstra, Transurban, Wesfarmers and Woolworths. We can add the local healthcare sector to this basket as well.
Examples of laggards that are experiencing their moment in the sun this year are Boral, Brambles, Codan, Fisher & Paykel Healthcare, James Hardie, NextDC and Orora, but equally so the aforementioned GUD, BlueScope, and most household names in the local healthcare sector.
Positive performances have equally come from the creme de la creme inside the local technology sector. TechnologyOne just posted a fresh all-time record high, would you believe, but so has WiseTech Global, while Altium is now approaching its peak from late 2021 and Pro Medicus shares are not far off last year’s record high.
I have no doubt value investors are now scratching their heads, unable to explain why. That head scratching might well continue for longer since many of the high-quality operators on the ASX are noticeably back in favour this year, including all but two of the 14 stocks on my list of my All-Weather Performers, and all but one of the stocks listed as Potential All-Weather Performers.
Two observations stand out and should be on investors’ minds: Australia is not simply copying the US, there is a definitive local flavour in this year’s market, and the swing towards quality and defensives, including the proven, reliable performers in multiple sectors.
Contrary to what today’s year-to-date gains suggest, investors locally are well aware of the risks that lay ahead. It’s why they prefer QBE Insurance over Westpac, Telstra over Vicinity Centres, and Aristocrat Leisure over Pointsbet.
I think that’s the real message to take away from the above.
Meanwhile, we are seeing some major division in views among the brokers on what lies ahead for the rest of the year.
The first thing that catches the eye when checking Goldman Sachs’ selection of “conviction buys” for Australian and New Zealand stocks is the damage that has been done to some of the inclusions, in particular Temple & Webster and Omni Bridgeway.
The list also includes Elders, Lifestyle Communities, Qualitas and Westpac for which sharemarket momentum has equally not been positive.
Much better performances have been posted by Fisher & Paykel Healthcare, Iluka Resources, Qantas, REA Group, Rio Tinto, Webjet, Woolworths and Xero.
The broker’s selection of 14 companies last changed in early March when Rio Tinto was added.
At the same time stockpickers at UBS are clearly singing from a different song sheet. They also have a broader selection, both positive and negative.
Starting with the smallest selection first, UBS’s list of least preferred stocks no longer includes Endeavour Group and InvoCare, but Harvey Norman was added to Bega Cheese, NAB, Pilbara Minerals, Pinnacle Investment Managers and Vicinity Centres.
The much larger selection of most preferred stocks now includes APA Group, TPG Telecom and WiseTech Global, while ANZ Bank and Telstra have disappeared.
Remaining most preferred: IGO, Orica, Santos, South32, Netwealth, QBE Insurance, Steadfast Group, Suncorp, Aristocrat Leisure, Amcor, IDP Education, Qantas, Seek, Seven Group, Transurban, Treasury Wine Estates, Wesfarmers, and Worley.
It is UBS strategists’ view that successful investing in 2023 will be all about selecting the right stocks, and much less about being on the right side of macro momentum.
Rudi Filapek-Vandyck is editor of the sharemarket research service Fnarena.com
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