All Ords Report 12 January 2016
It’s time to take a look in the rear view mirror, to recap on the best and worst performing sectors for 2015, and to consider what areas may provide the best gains for 2016.
Firstly, the All Ordinaries Index (XAO) closed down slightly for the year ended 31st December 2015. Looking back to the prior calendar year, the same could be said, as the index also failed to close in positive territory at the end of 2014. Why is this important?
Well, history reveals that it’s rare for the market to end in the red for three consecutive years. Given this, and my overall analysis on the market for 2016, I believe that the XAO will be trading higher by the year’s end.
So, what areas of the market boosted portfolio returns and what dragged them down?
There was a clear distinction between the sectors. Health Care (XHJ), Industrials (XNJ), Information Technology (XIJ), Property (XPJ) and Utilities (XUJ) all performed well. Energy (XEJ) and Materials (XMJ) fell heavily into the red; by around 39% and 32% respectively, therefore portfolios with a heavy weighting to these areas will have felt the most pain.
When the market has been rising, you are less likely to see such a big distinction between the sectors. I still find that most people have very little idea as to whether a particular sector is going up or down in the longer term, unless they’ve learnt to examine a long term price chart.
A gentlemen who is currently learning the foundations of trading the share market, through my Trading Mentor Course was surprised at what he could see on the chart with a little know-how. He said “Determining direction is quite simple when someone shows you how”, and he’s right.
Back to the sectors
Many stocks in Energy and Materials have been making new long term lows, some are testing levels traded ten years ago. But if a sector is trending down, does that mean all stocks in the sector will be down? Not necessarily. However, selecting a good company that has the potential to grow its share price becomes more challenging. It would still pay to have the bulk of the stocks in your portfolio in other sectors.
Remember too, when studying the sectors, that the movements on the chart may be dominated by either one, or just a small number of stocks. For this reason it pays to drill down within the sectors to see the direction of individual stocks.
Looking ahead, one cannot assume that just because a sector does well one year that it will repeat this performance in the next. That said, I believe that Health, Financials, Information Technology, Property, and Industrials will provide stability for portfolio returns this year.
What do we expect in the market?
The Australian share market failed to launch into the New Year with a bang. In the first few days of trade the market gave away much of the short lived pre-Christmas cheer. After breaking back above 5300 points by the end of December, the gains were eroded in just a few days by global market concerns, particularly around China. This played into the hands of the hedge funds, who have been circling many markets, selling into weakness and exacerbating volatility.
Last week, the Chinese market closed on two occasions, the latter after it fell by 7 per cent in less than 30 minutes. The sell-off was in response to the Chinese government’s decision to peg their currency lower against the US dollar. Global markets have been wary of intervention by the Chinese for some time, and comments have been made in the media about how the Chinese government may be holding its cards close to its chest, as growth continued to be downgraded. So where will it end?
I believe that markets will settle down over the next couple of months. That said, this is the year of the Monkey on the Chinese calendar; a year of great potential. However the Monkey, while it has the best intentions, can play havoc, and be quite mischievous. Perhaps one could say we have already seen the monkey at work.
What does this mean for investors?
I believe that in the short term, volatility will continue to be on the higher side, therefore some stocks may trade slightly lower over the coming weeks. That said, the market is currently testing support once again at around 5000 points and this level is holding. As I’ve mentioned in previous reports, we may see the market dip below it before the selling halts. Strong support exists between 4750 and 4900 points, and if it falls, I would expect the rebound to be rapid.
The best thing you can do is to have a plan for your portfolio, make decisions based on logic, not fear, favour defensive stocks, and be prepared to take a loss to preserve capital. If you are managing your own portfolio and haven’t learnt to set stop losses, now’s the time to learn as some stocks in the Energy and Materials sectors may continue to fall this year.
Remember too, there will always be ups and downs in the market, however over the long term the market spends more time rising than falling. For this reason, it’s important to always have at least one foot in the market in preparation for the next rise. My analysis indicates that direction will change in the current quarter, so be ready.
Dale Gillham is Chief Analyst at Wealth Within