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Most readers will now be aware of the startling performance we have seen from particular sectors over the past few months. Particularly as we have been following these sectors regularly in this section of the Trading Tutors Newsletter.
The sectors that have experienced the majority of our focus has been those exposed to developing markets, namely materials and industrial plays, which to date has worked extremely well, particularly for those leveraged to outperformance of our mid-cap miners.
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What we can’t forget, is those sectors which have underperformed, yet still remain leveraged to our own, robust economy. Sure, China has outperformed the global markets and those stocks leveraged to Chinese demand are likely to continue with these gains. However, as a result of this shift to being overweight Australian resource stocks, there are a number of high quality companies which have suffered due to sector rotation, namely in the financial sector.
Australian banks have long provided a regular income stream for Australian funds and investors. More recently, however, the major banks have grossly underperformed in the ASX 200 and particularly the materials sector. As the earnings season gets underway at the time of writing (NAB will be the first cab off the rank), we will more than likely be reminded that the major banks are still in a healthy financial position and set to benefit from a robust Australian economy.
Both technically and fundamentally, the Australian ‘Big Four’ still hold a place in any well-diversified portfolio. The purpose of today’s article is not to steer investors away from those sectors which have recently outperformed, but more to highlight the fact that Australian banks have perhaps been left behind in the most recent rally and could well provide above average gains in the near term as well as an excellent opportunity to top up those long term holdings. Historically, the Australian financial sector has tracked the ASX 200 with a degree of correlation. Since late September, however, the XFJ has underperformed the broader index by nearly 2%.
The question one needs to ask is this: ‘Will the average Australian continue to require a mortgage?’ If the Australian dream to own your own home is still alive, then the answer is yes. If the Australian economy continues to improve over the long term, then the answer is still yes. If economic growth and prosperity plays a part in the lives of Australians and Australian businesses, then the answer is also yes.
By the time this article goes to print, two of the major banks will have reported quarterly earnings to the market. Expectations remain high, the outlook is positive, yet the financial sector appears to have drifted into the shadow of the already buoyant materials space.
Always diversify, continue to buy value and be one step ahead of the rest. The Integrated Investor Suite allows investors to analyse earnings, growth and dividend history on major stocks combined with technical setups to achieve the best possible investment decisions. If you haven’t seen the Integrated Investor Suite, take a look at the following introductory video: Integrated Investor -What’s it all about?
Stay ahead of the game,
Lachlan McPherson
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