ASX market comment 1 June 2012

May was a bad month on the ASX, with the market down 7.3% (worst month since May 2010 … May strikes again!). I’m sure many investors are keen to turn the page into June!

Yesterday the market put in a decent showing with the XJO down a measly 12 points (-0.3% to 4064). Hardly significant or meaningful. However what got me thinking was some comments I received that the market “felt” a lot worse than it actually was. So I decided to examine the performance of the most liquid stocks (average value traded per day of over $5m). There are 111 such stocks. I then looked at the performance of the 20 “riskiest” stocks (measured by beta) vs the 20 most “defensive” stocks. The results summarise in the chart below:

Fairly remarkable. On a day when the market was essentially flat, risky stocks returned -2.9%, while defensives were unchanged. (Outperfomers included TLS and the banks).

Reasons I can suggest for this:

  1. The macro environment is obviously poor (negative headlines everywhere, Chinese data at 11am was also perceived negatively).
  2. The equity market is pricing in further interest rate cuts. In this environment defensive stocks will outperform handily.

I would suggest defensive stocks could be accumulated on weakness. On my watch list are property trusts and utilities that pay quarterly or semi-annual distributions in the last week of June (most of them but not for example WDC). I will also be looking at liquid industrial stocks that pay dividends in August and early September (eg TLS, CCL, WOW, AMC, ANN). Its important that the stock should be very defensive … this excludes mining, mining services, energy, consumer discretionary and media stocks for example.

I won’t be rushing though – last night the S&P 500 was -2.5%, the worst performance in 7 months. So there’s probably time to get set …

Happy investing

Ed

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ASX Macro View Week Ending 17 Feb

Chart below shows the S&P/ASX 200 (black) relative to the S&P 500 (blue).

Clearly the Aussie market is underperforming significantly, a topic dealt with here: http://macro-man.blogspot.com.au/2012/02/2012-non-predictions-equities.html

I’m tipping this underperformance to continue … obviously credit conditions are relatively tight here vs everywhere else which is positively awash with liquidity (add Japan to this list). Our key sectors have little growth – financials sufffering from weak credit growth while resources facing the double whammy of a strong currency and cost pressures.

In addition I believe the high AUD makes the market a good relative short. And I suspect long only investors with global mandates do not see buying the market with the Aussie at 1.07 as attractive.

So fairly sangiune for now. Would like to be more enthusiastic!