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There are quite a large number of major stocks that are showing short term weakness – AGL, AMC, AMP, ANN, CSR, HVN, JHX, LLC, MAY, NCP, OST, PPX, QAN and SRP to name but a few from the list of optionable stocks. These stocks alone can have a softening on the All Ords in the short term. The big picture is however upwards and this will be a mere short term aberration.
I promised last week that I would look in more detail at influences on the Australian market and what sectors might be the performers in 2004.
Why not start with the Lil’ Aussie battler. My view is that we are likely to see the dollar reach the $0.90 level – this is the highest forecast I have seen, but technically this is very achievable based on Fibonacci projections. Fundamentally it is not out of the question either, although many will argue that this is unsustainable as it is well outside “fair value” range.
The dollar is important for some market sectors such as rural and mining as a rising dollar will curtail export pricing. In contrast importers will be able to obtain lower prices and thus imported capital equipment and durable goods will in turn be cheaper which will be a fillip to demand for such product ranges over coming months.
Sector and stock picking will be the key to success in 2004. But regardless of what stocks you pick within sectors it is essential to have good risk management in place. This will ensure you will not be holding such shockers as AMP, ALL, COH, GYM – and there are others! Beware the “dog theory” that you buy the dogs of last year – it just doesn’t work. Stock selection is a much more specific process than that.
I have been calling the banks down now for some months and I note that there is now some momentum to this view. This occurs at a time when I believe some banks are now looking not that bad. NAB by far looks the weakest of the bank majors, with WBC and CBA showing some signs of life – don’t be surprised to see upside here. Other stocks in the Financials sector (XFJ) that are likely to influence this group are the insurance family. Whilst AMP could show further weakness IAG, QBE and PMN give promise of further upside in coming months. In summary I see sound momentum in the Finance and Insurance sector for 2004.
Other sectors that I expect will show strength include Materials (XMJ) Energy (XEJ), Telecommunications (XTJ), Utilities (XUJ) and Small Caps (XSO). I believe the strongest of these will be Small Caps and Materials. In all cases stock picking will be critical. So it will be important to undertake careful research, whether this be Technical or Fundamental.
Sectors that are likely to underperform are: Health Care (XHJ), Consumer Staples (XSJ) and Property Trusts (XPJ). As a “home exercise” you can have a look in your software at what stocks make up these sectors and I am sure it will become apparent to you that the lacklustre performance will continue.
It is important to be aware that sectors are much broader than previously and as such they are not as useful as previously. Thus it is important to look behind the general sector, analyse the sub sectors and look for other supporting evidence. For example XMJ contains Resource and Gold companies which are likely to perform well whereas Building Materials in the same sector are likely to struggle due to the downturn in building and construction.
To track the likely performance of Gold stocks it will be useful to watch Gold Futures. To seek confirmation of the likely performance of Resource stocks watch the CRB index. This will also be much easier than watching individually copper, nickel etc.
Media gets lost in Consumer Discretionary as does Hotels, Leisure, Durable Goods but PBL, SEV and others that have had a good run over recent months should maintain strength whereas NCP will struggle. Be selective.
Throughout the year I will conduct further on-going sector analysis. So as they say...“watch this space”
Enjoy the ride.
Tom Scollon
Editor
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