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Tom Scollon
Chief Editor The standout sector for 2004 was Energy – up 43%, boosted by the uncertainty of supplies from the so-called trouble spots. There was a major divide between the oil ‘haves' – Middle East and Africa and the ‘have nots' – the major world factories in USA, Japan, China. And because these super factories were steaming ahead, the demand looked to be insatiable. The demand supply of the equation is likely to ease and as we have come to accept uncertain supplies it will take a lot more to freak oil traders and thus we are unlikely to see the same volatility in the oil price as we saw in 2004. That is not to say oil stocks are likely to underperform in the coming year, it just means they will not rocket ahead as they did last year.
It is important to note that when you read about sector movements these are generally based on movements of the sector stocks within the top 300. This can lead to skewing and thus give the wrong impression. XTJ, which is the Telecommunications sector has only two stocks TLS, Telstra and TEL, Telecom Corporation. Other sectors that have a small number of top 300 stocks are Energy (XEJ), Information Technology (XIJ) and Utilities (XUJ).
Health Care was the second fastest growing sector – up 37%. Activity in this sector was driven by takeover activity in 2004 but it is likely to be a consistent performer not only in 2005 but in the coming years. Supply of products and services to the aging baby boomers will reap bonanzas for well run companies in these sectors.
My three other favoured sectors for 2005 are:
Materials: Demand for our raw materials is likely to remain strong throughout 2005 and possibly beyond.
Consumer Discretionary: Although we are now starting to save a little more than we have in the past, there is a lot of money awash in the economy and we will continue to spend freely on electronics, fashion and entertainment. Thus in this sector we are likely to see solid performances from the likes of the media companies with the big daddy of them – NWS - set to perform as it is about to depart our shores. NWS, which has been a frustrating stock – and contributed more than its fair share of volatility within our market – could make up some lost ground in the coming months. Already its staged removal from the Australian indices has started and this will continue in three more tranches when, by September it will no longer be in our indices. Despites its removal other sector members will push the sector higher.
Industrials: This sector is something of a catch all. But its diversity covers a wide cross section of Australia's booming industry, which should perform well in 2005.
As suggested in the last edition of Trading Tutors in 2004 we will see plenty of ups and downs in 2005 as our perception of inflation, interest rate movements and global growth rates wash around in our emotions.
Enjoy the ride.
Tom Scollon
Editor
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