ASX winners and losers for 2018

Calendar 2018 hasn’t exactly been the prettiest of years for the Aussie share market, with the S&P/ASX 200 down roughly half a per cent for the year to date, while also slipping roughly six per cent in October to find itself in a technical correction after investors took their cue from a dramatic slump in the US.

As this is the final issue for the year, Money Management thought it would be appropriate to look at those stocks and sectors of the market which managed to weather the storm and those which took a bit of a battering.

James Nguyen, portfolio manager and senior research analyst, equities, at Nikko Asset Management, pointed out that the Australian share market in the 2018 year to date underperformed both the US market and the rest of the world, as characterised by the MSCI World Index.

He also noted that consensus forecasts around 12 months ago were for the S&P ASX 200 to presently be in excess of about 6,000, which has not happened. However, he pointed out that a lot of this underperformance was due to a P/E (price-earnings) de-rating, as opposed to being driven by earnings.

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Nguyen said that, from a corporate perspective, earnings among Australian corporates are still very strong.

“The macro factors, the macro risk around trade wars, around Brexit, around European debt, sort of reared its ugly head, and in Australia around the peak of the housing cycle, these sort of put a dent in what investors are willing to pay from a multiple perspective,” he said.

CommSec chief economist Craig James argued that a lot of the underperformance of the Australian market in the year to date could be put down to a shift in investors’ focus on to whether value could be found Down Under.

And while he may not have “completed the sums” for the ASX’s performance over the course of 2018, James said the banks obviously had a difficult year given the Royal Commission, with the telcos also having struggled.

“The economy overall has been travelling well, so that’s not a major issue. But I think with some of our key stocks like the banks, like the telcos, people are questioning whether there’s better value and greater opportunities elsewhere,” he said.

“So, when you look at the total return on the Australian market compared with overseas, particularly in places like the United States, I think there is a degree of investor interest looking at the United States and saying, ‘Well, look, there’s just a range of opportunities there, technology as well as the normal sectors such as consumer durables and industrials, and the sorts of returns being provided are very good’. And the economy is rocketing ahead and certainly fuelled by tax cuts as well.

“So, I think what we’ve seen, particularly by local investors, is a little bit more thought being put in about where to put your money. And it’s not just in terms of domestic shares, it’s not just in terms of fixed interest or property – it’s a case of looking a little bit more in terms of overseas operations.”

James also believed the “old economy” theme that was very much in vogue around about 18 years ago to some extent has come back in Australia, with many investors feeling as though they now need to look to other locations to get a bit more diversification and a few more opportunities.

When it came to those ASX-listed companies which managed to outperform in the past 12 months, the slump in October notwithstanding, Nguyen said the focus was on the growth or high “ROIC” (return on invested capital) stocks.

“Earnings, certainly in growth stocks, have really performed well despite underperforming in the past month. So, you know the ones that really stood out from our perspective were CSL, given it’s such a large component of the index, Cochlear, Resmed, and the Afterpays and the Netwealths of the world,” he said.

He said it was the financials and the domestic cyclicals that had really underperformed, and to a lesser degree the consumer discretionary retailers.

“Again, that’s on the back of concerns around the housing cycle in Australia and the impact that will have on the consumer.”

Nguyen was also quick to reiterate James’s point that the Royal Commission “didn’t help the financial part of the market”.

Size matters not?

James said the mid and small caps continued to remain in favour in 2018, due to the growth opportunities that can be found in these areas of the market.

“There has been a challenge to the major companies, the top 20 or top 50 companies, by those a little bit further down on the league table,” he said.

But Nguyen said that while small caps had outperformed large caps over the past 12 months, the divergence wasn’t that extreme and that some of those small-cap stocks had in fact given back some of that outperformance in the October slump.

The bigger extreme, he said, was the divergence between growth stocks and what are traditionally considered to be value stocks.

“And by any measure, growth stocks have materially outperformed value stocks, and that performance hasn’t really been driven by earnings growth or earnings ‘beats’ – it’s probably been driven more by a P/E re-rate,” he said.

Looking towards 2019, Nguyen said while he was leaning slightly more towards the optimistic side of the spectrum, he would not describe himself as a bull.

He expected the market to be able to deliver a “decent” 10 per cent return, based on the fact the market multiple is presently trading at a marginal discount relative to history, despite earnings being relatively resilient and strong.

Against the backdrop of expected continued strength in the US market, Nguyen said if Australian corporates can deliver the earnings, his expectations are for the market to at the very least hold its multiple and give investors a decent six to seven per cent earnings growth with a four to five per cent dividend yield.

“If you dig down a bit deeper, our expectations are that, basically, the divergence within the index between value and growth should close,” he said. “So, expectations are if corporates can deliver the earnings growth, then the premium the market is willing to pay for these growth stocks, that multiple should de-rate and the discount on cyclicals should re-rate.”

CommSec’s James said he expected the ASX 200 to sit at about 6,500 points by the end of 2019, up from about from around 5,930 (as at 9 November 2018).

“When you look at our overall market, we would say it’s fairly valued. Companies are making money, the companies are very well run, and good, dependable longer-term returns can be expected from our market. And I think our perception is going to continue to hold,” he said.

“We’ve gone 27 years without a recession and I think we’ll easily notch up 28 years. When you look at the economic fundamentals behind the nation, the fact the population continues to rise provides an underpinning to economic growth and provides opportunities for businesses that perhaps they don’t get in other parts of the world.

“We have relatively high per capita wealth levels, people are well off, the standard of living is sort of fairly high, so I think continued economic growth, low interest rates and good fundamentals are going to continue to support the Australian economy.

“We’re certainly not expensive as a market, and I think while we’ve faced a few headwinds over 2018, 2019 may be a little bit more positive for some of the key companies as well.”