To the casual observer Australia’s economy is seen as simply a mix of banks, residential property and miners. While of course that isn’t entirely true, if you look at Australia’s benchmark stock market index – the ASX 200 – you’d be forgiven for thinking it was entirely the case.
This cracking chart, supplied by Auscap Asset Management, explains why many may deem Australia’s economy to be simply many houses and holes.
You’ll recognise many of the stock codes, even without the names. It’s the top 12 listed Australian stocks expressed as a percentage of the entire ASX 200 index. The top 4 spots are all held by banks, with Macquarie at number 10, ensuring financials hold 5 of the top 12 spots. Elsewhere the big two miners, the big two retailers, Telstra, Woodside Petroleum and CSL round off the list.
Combined they make up 50% of the market cap of the entire ASX 200 index, allowing the other 188 firms to squabble for the rest.
As Auscap note, “these companies are the most widely held in the domestic market, with an average market capitalisation of over $58 billion and a combined market capitalisation of approximately $705 billion. They make up the core part of most superannuation equities portfolios, whether through managed funds or self-managed accounts.”
Essentially everyone knows them and, be it directly or indirectly through their super funds, almost every Australian owns them. As a result their performance, and subsequent share price movements, not only dominate movements in the ASX 200 index but also the outlook for household spending, business investment and the overall economy due to their sheer size and profitability.
While many sell-side analysts maintain a bullish bias towards most of these stocks, Auscap aren’t convinced. Using fundamental analysis, they suggest that they “do not find particularly
compelling reasons to invest.”
“The largest banks are heavily exposed to Australian residential property, property that is expensive on a price to income basis, and trade at multiples of book value not seen in most developed markets,” the group notes.
They also suggest that the mindset that the largest miners are a buy because they operate at the lower end of the cost curve is also fraught with danger.
“The major commodity companies, BHP Billiton, Woodside Petroleum and Rio Tinto, are suffering from falling demand and a continued expansion of supply in the bulk commodities and energy sectors, the combined effect of which is significant and causing commodity prices to continue their adjustment back to the marginal cost of the large suppliers, last seen in the early 2000s.”
“We have never read an article, quite sensibly we would suggest, that promotes owning a retailer who faces major earnings headwinds, perhaps the result of increased competition both online and foreign, simply because they are the lowest cost supplier.”
Auscap also suggests that Telstra, along with Australia’s largest retailers – Wesfarmers and Woolworths – also facing margin pressures due to increased competition, both from established and new entrants to their markets.
“A portfolio largely exposed to the most popular stocks in the Australian market is one that faces meaningful earnings headwinds over coming years,” they note.
“It is our view that ultimately earnings drive share prices, underlying the difficulty the broad index faces in progressing in light of the challenges facing the largest Australian companies.”