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Australian Sectors Review January

Carl Capolingua Carl Capolingua 18/01/2021
Australian Sectors Review January Australian Sectors Review January
Australian Sectors Review January Carl Capolingua
Following on from the ThinkLearning:3 Sectors to Watch in 2021 webinar on Wednesday 13 January, it is perhaps an opportune time to take a closer look at each of the major sectors within the Australian Market.
 
The Global Industry Classification Standard or "GICS" is the typical method for classifying stocks into groups which best define their business. There are 11 main GICS sectors for the Australian market and many sub-sectors to these. Each main sector has a corresponding index which aggregates the performance of the stocks within the sector, much like the S&P ASX 200 does for the 200 largest capitalisation stocks listed on the ASX. Also, like the S&P ASX 200 (XJO), each as a corresponding ticker code so investors can check the price of the index on the ASX website or with their preferred data provider.
 
A popular sub-sector that we also watch closely, and that also has a ticker code, is the S&P ASX All Ordinaries Gold Index (XGD). Not so much a sub-sector, but a standalone index, the new S&P All Technology Index (XTX) is also a popular aggregator of the major technology stocks listed on the ASX.

ASX_Sectors_Performance_Chart

Let's now take a quick look at the performance of each sector so far in 2021, and offer some suggestions on the most prospective stocks within each.

Consumer Discretionary Sector (XDJ)
This sector is certainly in the midst of an upgrade cycle (refer to numerous profit updates over the last few weeks including ARB, Nick Scali (NCK), Accent (AX1), Shaver Shop (SSG), and Premier Investments (PMV)).

On 13 January, the RBA reported that the household savings ratio in Australia has risen to 18.9%. This compares with around 5% pre-pandemic. This an extraordinary spike, no doubt caused in some part by our inability to spend on travel and entertainment in 2020. 

The sizeable rise in household cash balances is even more surprising given that much of our travel and entertainment budgets were diverted to towards retail therapy, home improvement and refurbishment, and autos during the pandemic. The bottom line is: Australians’ bottom lines are looking extremely good right now! Further, with interest rates on savings accounts and term deposit at all-time lows, there is a strong probability that we’re going to continue to spend big this year. (Note, some of the 'spending' is also likely to include shopping for higher yielding Australian shares.)

Our key picks within the Consumer Discretionary Sector include: Fleetwood (FWD), Super Retail Group (SUL), Lovisa Holdings (LOV), Redbubble (RBL), Nick Scali (NCK), Wesfarmers (WES) (find our extended list of Consumer Discretionary Sector buys in the 3 Sectors to Watch in 2021 webinar and in the media link below).

 
(Source: AusbizTV January 11, 2021. "A technical view of the ASX; when we may reclaim that record high". Full interview available from: https://www.ausbiz.com.au/media/a-technical-view-of-the-asx-when-we-may-reclaim-that-record-high-?videoId=6471)

Consumer Staples Sector (XSJ)
Often considered to be the Consumer Discretionary Sector's "boring cousin", this sector wore boring as a badge of honour in pandemic-plagued 2020. It was the fourth best performing sector last year after high-flying Technology, Materials, (and you guessed it) Consumer Discretionary. It turns out, during a pandemic, being boring is a good thing. This year however, as the global economy swings back to recovery and growth, boring may once again be…well just plain boring.

Still, there are a few companies in this sector which we feel have attractive valuations and just as attractive charts. Our key picks within the Consumer Staples Sector include: Australian Vintage (AVG), Costa Group Holdings (CGC), Clean Seas Seafood (CSS), Elders (ELD), Ridley Corporation (RIC).

Energy Sector (XEJ)
This sector is most likely playing a little catch up as it was the clear laggard in 2020. Assisting the recent re-rating, crude oil prices have risen around 10% since the start of the year. The 5 January of meeting of OPEC+ demonstrated that the Cartel remains disciplined and committed to their intended supply targets/restrictions. As a result, expectations are firming that crude oil prices can remain strong (i.e., investor are discounting the possibility of another March-style wipe-out).

We believe that there’s still plenty room in terms of upside for energy companies, both from a valuation and chart perspective. Our key picks within the Energy Sector include: Cooper Energy (COE), Karoon Energy (KAR), New Hope Corporation (NHC), Oilsearch (OSH), Senex Energy (SXY), Strike Energy (STX), Whitehaven Coal (WHC), Woodside Petroleum (WPL).

2021-01-15_WTI_Crude_Oil_Chart
 
Financials Sector (XFJ)
Whilst the charts point to further upside for the banks, they’re hardly screaming value at current prices. The banks should swing back to their traditional status as cash and dividend cows in 2021, but are likely to continue to be plagued by low single-digit earnings growth rates and margin pressures. Despite this, we do see some upside in financial stocks in 2021 as investors seek out yield, and as the real estate market strengthens.

Our key picks within the Financials Sector include: Australian Finance Group (AFG), Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), Money3 Corporation (MNY), Resimac (RMC) and Suncorp (SUN). Perhaps also, you might consider the following exchange traded funds (ETFs) for this sector: SPDR S&P/ASX 200 Financials EX A-Reit Fund (OZF), Betashares Australian Financials Sector ETF (QFN).


(Source: AusbizTV January 08, 2021. "Capolingua: If you don't own Tesla, it's time to take a small slice of the Musk-sized pie". Full interview available from: https://www.ausbiz.com.au/media/capolingua-if-you-dont-own-tesla-its-time-to-take-a-small-slice-of-the-musksized-pie?videoId=6457)

Gold Sector (XGD)
Fluctuating gold prices through 2020, with sharp swings both up and down, mean this sector is not for the fainthearted. However, we are in the camp of stronger, or at the very least elevated, gold prices through 2021. As many gold producers have focussed on ramping up production and cutting costs, the sector is well placed to generate very strong free cash flows through the year. This sets the scene for some potentially juicy dividend payments. Our key picks within the Gold Sector include: Gold Road Resources (GOR), Pantoro (PNR), Westgold Resources (WGX).

2021-01-15_Spot_Gold_Chart

Healthcare Sector (XHJ)
This sector has clearly lagged its peers since the start of 2021 as it struggles with the continued impact of the pandemic and a steep rise in the Australian dollar. Majors CSL, Cochlear (COH), Resmed (RMD) and Ramsay Healthcare (RHC) each have significant overseas earnings. The rising Australian dollar reduces the value of those earnings. Also, each company has reported that restrictions on movement due to the pandemic is adversely impacting their ability to conduct business.


(Source: AusbizTV January 18, 2021. "Healthcare: the serial underperformer of 2021". Full interview available from: https://www.ausbiz.com.au/media/healthcare-the-serial-underperformer-of-2021?videoId=6570)

We’re going to get some quarterly and half-yearly updates over the next few weeks. Based upon recent share price moves, it looks like investors are taking some event risk off the table. Let’s just say we’re not exactly in an upgrade cycle for healthcare.

If there is one interesting sub-sector within the Healthcare Sector, it is medicinal cannabis. We'd watch Cann Group (CAN) in that space, and will no doubt go into more detail on this sector in later updates. For now, our key picks within the Healthcare Sector include Healius (HLS), Mach7 Technologies (M7T), Probiotec (PBP), Somnomed (SOM).

2021-01-15_CAN_Chart

Industrials Sector (XNJ)
These are the companies that do the heavy lifting in the Australian economy, and for some of them like earthmoving equipment hire company Emeco Holdings (EHL), quite literally so! Many of these companies' earnings are cyclical, and therefore they have suffered in the economic downturn in 2020. Qantas is the perfect example here. But, as a group, this sector is well placed to take advantage of the local and global economic recovery as it develops in 2021. Our key picks within the Industrials Sector include: ALS (ALQ), Alliance Aviation (AQZ), Bingo Industries (BIN), Emeco Holdings (EHL), Lycopodium (LYL).

Information Technology (XIJ & XTX)
Technology pervades our lives. This means the technology sector contains stocks whose businesses cover all of the major sectors, from financials, to healthcare, consumer discretionary, telecommunications, and beyond.

This sector was no doubt the rock star of pandemic ravaged 2020. The pandemic accelerated a number of structural shifts that were already working their way through the global economy. For example, there are millions of people who used Zoom or Skype to meet in 2020, and many used online shopping for the first time. Some will probably return to their pre-COVID way of life, but for most, their experience of technology in 2020 is going to mark the start of a permanent change in behaviour.

The technology sector will continue to innovate, to facilitate adaptation in habits, and to improve the way we live and interact with our world. Investing in the technology sector is not for the fainthearted however. Whilst this sector boasts stocks with some of the fastest growth in earnings anywhere in the market, it is also typically the most volatile sector.

Our key picks within the Information Technology Sector include: Perhaps also, you might consider the following exchange traded funds (ETFs) for this sector: Audinate (AD8), Afterpay (APT), AVA Risk Group (AVA), Brainchip Holdings (BRN), Dicker Data (DDR), Family Zone (FZO), Frontier Digital Ventures (FDV), Smartpay Holdings (SMP), WhiteHawk (WHK).

2021-01-15_APT_Chart

Materials Sector (XMJ)
This sector has run hard so far in 2021 as metals prices, particularly iron ore, copper, and nickel have soared. Many charts have spiked higher, and there is a risk that a few have overshot for the time being. Therefore, we are more likely to see a retracement, or at the very least a consolidation, in some of the high-flyers in this sector in the near term.

However, bigger picture, the Materials Sector remains one of our key sector picks for 2021. With a 1-year forward PE of around 13.5, this sector remains the cheapest on the ASX. It’s also likely to have one of the highest dividend yields in 2021. Our key picks within the Materials Sector include: Oz Minerals (OZL), South 32 (S32), Nickel Mines (NIC), and New Century Resources (NCZ). Perhaps also, you might consider the following exchange traded funds (ETFs) for this sector: Vaneck Vectors Australian Resources ETF (MVR), SPDR S&P/ASX 200 Resources Fund (OZR), Betashares Australian Resources Sector ETF (QRE).

2021-01-15_NIC_Chart

Property Sector (XPJ)
This sector was hit particularly hard by the pandemic on 2020 as movement ground to a halt. This spelled significant difficulty for office and retail property companies, which was only partially offset by those exposed to warehousing (think online retailers expanding their distribution centre spaces). 

Property is typically a highly leveraged sector (i.e., lots of borrowing), and this meant that many had to resort to massive capital raisings to stay in the black. Since the start of the year, the Property Sector has taken a further hit due to the recent spike in long term interest rates. Rising interest rates increase pressure on earnings of debt-laden businesses, which in many cases are awaiting a return to 'normal'. 

Our key picks within the Property Sector include: Home Consortium (HMC), Primewest (PWG). Perhaps also, you might consider the following exchange traded funds (ETFs) for this sector: Vaneck Vectors Australian Property ETF (MVA), SPDR S&P/ASX 200 Listed Property Fund (SLF), Vanguard Australian Property Securities Index ETF (VAP).

Communications Services Sector (XTJ)
This is a tricky sector because there is considerable overlap with it and the S&P ASX All Technology Index. Traditionally, this sector has been seen as the "Telstra Index" given Telstra (TLS) is its largest stock by market capitalisation. It also contains a number of interesting media and internet commerce companies like Newscorp (NWS), Seven West Media (SWM), Carsales.com (CAR), REA Group (REA), and Seek (SEK), the last four of which are our key picks within the Communications Services Sector.

Utilities Sector (XUJ)
Similar to the XTJ, this one tends to be dominated by the performance of one stock, AGL. Unfortunately, AGL has had a number of operational issues in 2020, most recently with an electricity generator shutdown that resulted in a profit downgrade in December.

More broadly speaking, the sector also tends to fare poorly when risk-free rates (the rates of interest on long term government bonds) are on the rise, as it loses its comparative advantage from a yield perspective. Our key picks within the Utilities Sector include: Origin Energy (ORG), De.mem (DEM).


(Source: AusbizTV January 08, 2021. "Capolingua: If you don't own Tesla, it's time to take a small slice of the Musk-sized pie". Full interview available from: https://www.ausbiz.com.au/media/capolingua-if-you-dont-own-tesla-its-time-to-take-a-small-slice-of-the-musksized-pie?videoId=6457)
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

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Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Mohammed Zidan
Mohamed Zidan
He has more than eight years of experience focusing on Forex, Commodities, Indices and global economic developments as well as central bank policies and intermarket analysis.
Victor Golovtchenko
Victor Golovtchenko
Victor Golovtchenko has been trading on the foreign exchange markets since 2004, and is actively involved in the online media space since 2014. His tenure as a Senior Editor follows his role with TradeStar.
Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.

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