Which three ASX sectors could shrink in the future?
There are three sectors of the Australian Securities Exchange (ASX) which could shrink in the future as capitalisation of companies adjusts, according to IML.
Asked in a webcast about the ASX composition, Hugh Giddy, head of research and manager of the Concentrated Australian Share fund said he believed three sectors were at risk.
Currently, financials was the largest sector on a market-capitalisation basis, accounting for 46% of the ASX 20 index thanks to firms such as Commonwealth Bank, Macquarie Group, Suncorp and Westpac.
“Banks have been under pressure for some time and I don’t see that changing because low rates are here to stay. Low interest rates are tough for banks as it makes them harder to earn good margins, we haven’t had a bad debt cycle since the Global Financial Crisis and we haven’t had a recession for a long time so we haven’t seen the banks dealing with bad debts for a long time. So I think banks could shrink,” Giddy said.
“I think the technology stocks could become a smaller portion of the ASX because of the valuations.”
Technology firms in the ASX 200 included Afterpay, Xero, Wisetech and NextDC but there were concerns about the profitability of these companies and whether their results justified the valuations.
Lastly, he said the end of a resources boom could be problematic for commodity firms such as BHP Billiton and Rio Tinto.
“Commodity prices are quite high so if the economy weakens a bit, so far we’ve had Government stimulus but if the economy weakens as the oil price has done then the miners could shrink a bit. Australia has been having a resources boom for 17 years and that can’t continue ad infinitum. That means industrials stocks should do a bit better,” he said.
Gambling
Meanwhile, the firm was betting on gambling firms Tabcorp and Crown Resorts to return the strength after the pandemic.
Tabcorp, which operated the Lott lottery business as well as betting business Tab, was described by the manager as an ‘amazing business’.
“Tabcorp has a wonderful lottery business, it is an amazing business that is guaranteed to make money and it has been good at increasing revenue by changing the game rules,” said Giddy.
“The business has grown during COVID-19 as people have had more money from the government handouts, people are buying hope and it is a durable business.”
Since the start of the year, Tabcorp and Crown were both down 21% versus losses by the ASX 200 of 4.9%.
AUTHOR
Laura Dew
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