Overview

Over the year ending 30 June the ASX 200 Accumulation index fell by -6.71%.

Overview

It was another disappointing year for sharemarket investors as global growth concerns dominated investor sentiment. Unsurprisingly, those sectors with more defensive earnings outperformed the broader market. These included Telecommunications +27%, Utilities +10% and Health +8%. In contrast, sectors with cyclical earnings, especially those most exposed to global growth, underperformed. These include metals & mining -32%, materials -30%, and energy -21%. Gold also was a key underperformer on volatile trading. In recent years, gold had become the preferred safe haven but prices reversed as investors chose alternative havens (Swiss franc, US dollar, Australian dollar) on valuation concerns.

Outlook

Our outlook on some of the main sectors follows:

Banks

Recommendation: Modest Underweight
Despite subdued housing credit growth and business credit growth, the major banks have continued to generate strong profits from loan margins and fees and charges. We expect this trend to continue over FY13. With gross dividend yields of around 10%, prices are likely to remain well supported. Nevertheless we recommend a modest underweight exposure to this sector as the potential contagion effect from a Eurozone banking crisis remains a risk.

Resources

Recommendation: Moderate Underweight
Over-investment in housing and infrastructure in China is likely to lead to a slowdown in demand for Australia's key resources (particularly coal and iron ore) over the next 12 months. With global growth slowing and supply increasing, it is unlikely that the slack will be taken up by other countries. In the short term, recent efforts by Chinese authorities to stimulate growth (reduced interest rates and announced some new infrastructure projects) may provide some relief but this is likely to be short-lived.

Energy

Recommendation: Market weight.
Slowing global growth coupled with plentiful oil inventories, should theoretically put downward pressure on oil prices. However, ongoing tensions in the Middle East (in particular, the United States aggressive stance against Iran) have the potential to send prices soaring.

Consumer Discretionary

Recommendation: Moderate underweight.
Recent interest rate cuts coupled with relatively low levels of unemployment should provide some support to the beleaguered retail sector. That said, the structural shift to on-line shopping continues unabated and that, together with ongoing global uncertainty, may well counteract the positives.

Conclusion

In the short term, deteriorating global economic fundamentals coupled with domestic challenges may limit near term sharemarket gains. For this reason, we continue to favour high quality defensive stocks over those exposed to cyclical growth. Nevertheless, the Australian sharemarket continues to trade on depressed multiples that represent compelling value for investors prepared to adopt a long term view. Further, the gross dividend yield of over 6% compares favourably to alternate income options (albeit less risky) such as cash and bonds. On balance, we recommend trimming exposure from moderate overweight to mild overweight.

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